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More Warnings About High-Frequency Trading
bfwebster writes "From The Big Picture (a great finance/econ blog) comes a link to this New York Times article on some of the risks and problems of high-frequency trading on financial markets and a couple of 'gadflies' who are pushing hard to get some changes and reforms in how Wall Street handles HFT. Key question: when is fast trading too fast?"
Key question: when is fast trading too fast?
Trading is too fast when it ceases to mean anything. The rate at which these decisions are being made indicates that it is not going through a human mind. The stock market is about people being able to buy and sell securities that allows businesses to raise additional capital. It was originally a very social thing so much so that it could reflect the mood of the populace's strength and development.
Many ordinary Americans have grown wary of the stock market ...
Right you are! It's no longer about humans making decisions. It no longer reflects social aspects of a sector or country or world market. It's more and more about what algorithms your "opponents" are using and what your algorithms are set at. And that's where it ceases to make sense. I'm okay with some guy waking up at 3am and reading every newspaper in the world and beating me at stock trading. I'm not okay when the name of the game today is who can pay tons of money to have their own servers set up across the street from a major exchange with a special dedicated fiber going straight to them as they pay off said exchange. That's starting to become so abstracted from the initial concept of a stock exchange that these big firms have walled everyone else out.
... which they see as the playground of Google-esque algorithms, powerful banks and secretive, fast-money trading firms.
If only they were Google-esque algorithms, they'd at least be innovative. SNAFUs have shown they're far from complex and often so stupid they loose hundreds of millions. But, yeah, who in their right mind would play a game like that?
What the algorithms are buying and selling no longer make any sense, the turn around is so insanely quick on these trades that there is no point at which a normal human can say "Oh, that algorithm thinks that Microsoft stock is going up and will hold it for some amount of time." No, instead what's going on is someone put out a big pre-order for Microsoft stock and so the HFT guys are buying stocks at a lower price than that only to turn over and dump them almost instantly as the order actually comes through netting fractions of a penny.
My work here is dung.
My answer to this is very simple: more than once a day is too fast, and it should be forbidden.
The only way to objectively have a "too fast" is to have the time duration based on a constant.
Hence I recommend a plank's time constant (10 ^ -43 secs) as an objective time duration.
When the trading is done at a speed such that a human cannot observe the trade (or attempted trade) and react, then it is too fast.
Or to put it another way, trading should be limited to maybe1 trade every 2 to 3 seconds per stock.
If you pay a flat $9.95 per trade, and you do it fast enough (say 1 gigahertz) you'll be spending more money than the national debt in a few hours.
when your average investor is having an unseen tax applied to his transactions
which is what HFT is: an unfair tax by those who can afford the screamiest servers, the closest fibre optic connection, and the scariest code. it renders the idea of a fair marketplace a lie
the solution is easy: queue all trades on a heart beat
once every second, once ever three seconds, once a millisecond... whatever is agreed upon, all trades are queued up and then released on this schedule, and no one or nothing can surpass it
there are many complex unfair problems in life. but this is one with an easy solution. the problem is no finding the willpower to enact the change. as with many problems in american civil and political life, the will to do the right thing is polluted by the plutocrat's money
intellectual property law is philosophically incoherent. it is your moral duty to ignore it or sabotage it
HFT is very bad for the little guy, especially the individual investor. But, it's a straight up money printing machine for the big boys and they're not going to give it up. If you had managed to cobble together some code that printed money for you, would you be willing to turn it off simply because other people couldn't keep up? Hell no.
So it seems unfair, disingenuous at the very least, that we should expect them to turn off their money machines. But, even if laws were passed that said they couldn't use HFT, a possibility in light of the recently increased war on prosperity, do you really think they will stop? Or, do you think it far more likely that the HFT will simply go underground? Even if it is illegal, the little guy will still lose.
I would say whenever the system is operating faster than humans can understand or react. The way it is now, HFT is just a layer to siphon off money from people who do not have their own system.
A 5 minute hold on a purchased stock, either before delivery or before another transaction with it, would fix the HFT problem.
Though, if you listen to the people making money off HFT, there is no problem, and HFT benefits everyone through "increased liquidity". The problem is, the HFT system is flipping stocks on the ms scale, causing stocks to be less volatile (stagnant), and not really filling large time gaps of supply or demand that would cause liquidity issues.
while(1) attack(People.Sandy);
HFT could be curbed simply by raising the execution price for each consecutive trade a firm makes in an hour (or even in a minute). Won't affect most traders, but HFTs would become more expensive. There's really no incentive for the exchanges to do this, since they're raking in millions in co-location fees and they're able to claim lower execution times for most trades.
I hear the voice of Taleb warning of the rare event. I wonder what the possibility of many of these algorithm derived mass trades all hitting a stock simultaneously. Maybe they can make an entire company "blow up," or an exhcange, or an entire economy. But that is foolish thinking, by someone who doesn't know much of anything.
... pretty well before they introduced that pesky telegraph.
The speed of trading is irrelevant to the serious investor. Speculators will always make trades as quickly as possible to make a quick buck regardless of the fundamentals; investors will buy and hold based on the fundamentals, buying and selling after months, not fractions of a second. Prices will always revert to a more "intrinsic" value, regardless of any skewing by speculators.
Slashdot: Playing Favorites Since 1997
that my pension pot could become worthless in 0.005 seconds due to a programming error
Don't worry about frequency - just make them pay for it.
Price per stock traded per day. Trade in one stock, your daily fee is $X. Trade in two stocks that day? That'll be $X^2. Your third trade will cost $X^3 and so on. (Or some such similar mathematical relationship).
Then if you make the one good, careful decision, you aren't penalised. If you make multiple trades that are sure to make you money, you aren't penalised. If the market for that stock is collapsing and you NEED to get out, you'll pay it.
If you just want to play the numbers by trading in everything every fraction of a second and scoop off only the cream, then it's going to cost you BILLIONS per day.
It might have flaws but returning stability and reinserting good, thought-out decision-making back to the exchanges isn't one of them.
Key question: when is fast trading too fast?
When it ceases to be trading and becomes gambling instead.
Basically, if you are looking at numbers and not meaning, you aren't trading anymore. Here's a suggestion for a totally impractical test: If you call up the trader in question and ask him what the company behind the shares does (i.e. which business it is in) and he has no clue, then he's not a trader, he's a gambler.
Assorted stuff I do sometimes: Lemuria.org
It's more and more about what algorithms your "opponents" are using and what your algorithms are set at.
Only if you are in it for day-trading profits. And if you are, well, you deserve to be beaten senseless by some HFT algorithm.
If you're a long term investor, with a time horizon of many decades, this doesn't matter. For example, I have a stock I bought 15 years ago. It has gone up by around 3X in that time. HFT makes no difference to me when I've held a stock over many years or decades. The exact microsecond it sells doesn't matter to me after a period of decades.
The fundamentals are driven by stock valuations, which are based in what people guess about the future of the company. You can be as informed about that as anybody. If you believe a company will do well over the long haul, buy some of their stock. Don't worry about HFT. You don't have to microsecond-time your sale and beat some other HFT algorithm when you've made a lot of money over years, rather than little bit over seconds.
At such short timescales, trading is a provably zero-sum game. So where do all the fantastic profits that HFT operations claim come from? Everyone else. If you invest in a stock, during that process, an HFT algorithm (or ten) attempt to manipulate the market to cost you a fraction more, sweating the coins that you might receive. (The rest of the time, the HFT algorithms end up fighting each other, but apart from driving the market unstable, its only the HFT operators who win/lose amongst themselves, the HFT industry gains nothing).
Yet they don't actually provide the much vaunted "liquidity": if they did, they couldn't extract the revenue by making the liquidity dissipate when its actually needed: if the HFT bots added liquidity, Knight Capital wouldn't have taken a huge loss, as they could have sold the stock they bought back to the market rather than having to lose $400M! selling the shares to Goldman Sachs.
It really is time for a microscopic but non-zero Tobin tax on stock transactions: $.00001 per buy or sell request issued to the market. That should stop the bots from spamming the market with bogus requests, and level the playing field for everyone else.
Test your net with Netalyzr
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When H.F.T. first came out the approach of "buy when its going up and sell as soon as it ticked down" made some people a lot of money, because the H.F.T was just piggybacking on some human that had decided to move the stock for some reason that made sense. Now that so many of the trades are from H.F.T. algorithms what you have are computers piggybacking on computers moving the stock price all by themselves, and thus we have a feedback system with less and less damping as the percent of the trades that don't involve a person gets larger and larger.
Which of the many suggestions to prevent H.F.T. should be implemented is a whole topic by itself, but at this point H.F.T is now actively harming the purpose of the stock markets, that of providing a way for companies to get liquidity and for people to be able to *invest* in companies. It was good while it lasted for some people but it is time for H.F.T. to be consigned to the history books.
-jon
[...]tons of money to have their own servers set up across the street from a major exchange with a special dedicated fiber going straight to them as they pay off said exchange.
All major exchanges are providing or are going to provide a co-location service, i.e. the servers directly hosted in the exchange datacenter.
Plus it's not only stock exchanges, but also for instance commodities).
Here's what most magazines and newspapers discussing the topic are missing:
A definition of what we want the stock market to be like.
Everyone is focussing on what they don't want. But that's not how you build a resilient system. Basically, that's using default-allow for your firewall. You'll be spending the rest of your life adding rules of what you don't want.
Once you switch around your mind, the questions become a lot easier. Decide what you want the stock exchange to be, and you get your answers almost for free.
If you want the stock exchange to be a place where companies can meet investors and get capital raised, then everything that doesn't serve that purpose directly or indirectly is out. You define how the process should work and allow only that, done. Everyone who wants to play games will have to do it within the parameters you have defined.
The whole problem here is that too many people still believe the old nonsense about the invisible hand. Yes, to some extent you can build a sandbox and people will come and build their sand castles. You can provide a market place and have the participants sort out how everything works.
But you will get scammers, fraudsters, thieves, HFTs and all the other scum as well. If your sandbox is an MMO, you will get gold farmers and scammers and spammers. If your sandbox is a stock exchange, you will get HFTs and stock fraud and insider trading.
Letting chaotic self-organization create the rules of the game through emergence is an interesting experiment, one that I enjoy quite a bit when it comes to games or small settings (book a weekend with friends in a summer cottage and something will happen, no need to set up a schedule beforehand).
Allowing corrupt idiot politicians to base the world economy on chaos theory was one of the dumbest ideas we as a species ever had. Read some catastrophy theory first (at least check out the graphic if the article is tl;dr). There's a reason we call it chaotic systems, you know?
Assorted stuff I do sometimes: Lemuria.org
Once all the mega-capacity, low-latency networks have been installed.
As there's no limit to human stupidity, there will be none to HFT!
HFT can only work as long as there are humans directly involved in the trade chain and inclided to make (evaluation) errors.
Algorithms can be easily adjusted and even made "intelligent" to auto-adjust and auto-tune.
Then, once all trading will be done by computers with adjustable and tunable algorithms, HFT won't bring any real advantege any more.
Just infrastructure costs.
Sent as ripples into the electromagnetic field. No single photon has been harmed in the process.
The NYT article sucked. Can't wait for print journalism to die.
1) Here's some authorities who are authorities because we say so, who are fighting like little middle school drama queens
2) Everyone loves a good "rich people suck and they're corrupt
3) Rabble rousing tired old cliche of "kids have no idea what they're doing vs old people are obsolete"
If you want the real story try Stucchio's blog series beginning at:
http://www.chrisstucchio.com/blog/2012/hft_apology.html
My pitiful TLDR summary of Stucchio's work combined with some other observations
1) Idiotic SEC rule 612 quantizes share price into small enough increments that you can raise the capital to HFT and increments that are large enough that you can make some serious dough doing HFT. HFT is not caused by Bolshevists in your bathroom or too many atheists or gobblin infestations, its caused by a stupid SEC rule that was created in a snap of the fingers and can go away just as quick.
2) Ask ANY EE or "real" telecom guy HFT is a real world application of dithering to improve resolution. Oh the "real" price of a share is 100.003 but we're only allowed to report price to a resolution such that its either of two quantum states 100.00 or 100.01. Simple system solution? Dump out 10 orders, 3 at 100.01 and 7 at 100.00 to meet some idiotic SEC rule. Now "everyone" knows the real free market price is signalled at 100.003 even if the unfree market is only allowed to trade at one cent increments.
3) Most of the whiners on both sides have a dog in the fight, if they are in the business and can't HFT for whatever reason they hate HFT and if they can they love it. Or they're just doing witchcraft style persecution where no logical mechanism is necessary... my sheep died therefore we should hang some old woman is no different than my dotcom bombed therefore we should punish a successful HFT trader "just because".
4) The ratio of HFT trading vs retail trading is absolutely exploding not entirely because HFT is growing (although it is...) but because retail trading is absolutely dying. Retail is dying for two reasons: Headed into next down leg of the second great depression (bubbles usually melt up in price and down in volume) and demographic stuff like looking at labor force participation graphs tens of millions of working age americans are no longer working, therefore there is no need to invest their 401K and IRA money from non-existent jobs. So yes HFT is growing but don't make the mistake of thinking the ratio of HFT to retail is in any way relevant, because retail is terminally ill and almost dead.
5) Some elderly/lazy people get all confused about frontrunning (which is illegal) because both frontrunners and HFTers are nuts crazy about low latency and fast execution. Therefore they obviously must be the same, at least to an idiot. This is about as intelligent as the anti-vaxers ... "Getting hit in the head by a 2x4 causes stupidity... high levels of lead in the blood cause stupidity... therefore getting hit in the head by a 2x4 results in high blood levels of lead". Morons.
6) Some lazy people enter market orders instead of limit orders. Probably not a wise idea any time in the last 150 or so years, although it is an even worse idea when retail volume is melting down and HFT volume is melting up. You could ban market orders for retail investors, but stupid people are always going to find a way to lose money, so I'm not sure there's any point to it. There's an infinite pool of ways for morons to lose money so removing one isn't going to really change the outcome. Its not the end of the world in that any average long term retail investor trade has just about zero odds of being stuck in a "flash-anything" related HFT event.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
Posting AC as I've been working in HFT for 5 years now. You have no idea what you're talking about, errything you just wrote is absolute rubbish. It seems as if you would have the markets swinging wildly based on people's moods. There have been many many fat finger mistakes that were nothing to do with HFT, but you rarely hear about those these days. And when trading systems do go awry most exchanges have built-in and often automated undo not to mention penalties. Some exchanges even changes modes to auction when shifts over a certain percentage occur. This stuff is almost always blown out of proportion and you'd never read about the actual workings of the regulation and clearing processes which protect all players - believe me it is pretty tough building in some of the mandatory short circuits and all the realtime accountability documentation. There hasn't been the likes of Citi's "Dr Evil" algorithm since regulation caught up. Obviously I can't really elaborate on algorithms, but suffice it to say your understanding is naive at best - you're talking 2004 type games.
The stock market is about people being able to buy and sell securities that allows businesses to raise additional capital
FYI, the raising of capital stops when the IPO is completed. From then on, the securities change hands between investors, not between investors and companies. All the buying and selling that happens in the stock market, on any given day, is purely between independent investors. The company is no longer involved in the process, and the fate of their stock is entirely up to the market participants.
The rate at which these decisions are being made indicates that it is not going through a human mind.
That's a good thing.
One of the worst crashes in history didn't involve computers (1929) - that was ALL humans panicking and getting caught up in the margin call downward spiral.
Human traders trade on gut instinicts and emotions - even when there are no computers. Gut instincts are mostly wrong.
The best traders are actually folks who've had brain damage so that they don't feel much emotion.
And since HFT, I've been seeing much less large market moves because of piddly bad news. And any day to day volatility has no effeect what so ever on my investments - my strategy is measured in years.
It's all about the numbers and frankly, I prefer it that way.
#1: require all level 3 trading and market makers to be on custom low latency ntp servers/atomic clock etc
#2: establish a minimum time slice of 1 second
#3: if there is a descrpancy of more than 500ms between the timestamp in your transaction, and the recipient clock, the receipient clock is honored and the trade is bumped to the next time slice.
#4 each trader is allocated a maximum number of transactions per time slice of no more than f(n), where f() is a function something like f(n)= X * 1/f(n-1) + X )
( where X is a constant set by the exchange ) This way the maximum volume you can have in your trade is 2*X, but at the next time step ( n) your maximum can only approach X . I'm sure something more sophisticated should be done here. IANA mathematician
#5 Or as a possible "reward" scenario, X could be not constant, but be a variable that starts low and the longer the period between trades from an entity, the larger the value X can grow ( to fixed ceiling )
I'm just making this stuff up on the fly, but it would seem to me that all sorts of stuff like this could be done to minimize gaming the system. The exchanges should hire brains from Video game anti-cheat system coders ( like the old punkbuster ). That would seem to be a good place to start!
No, instead what's going on is someone put out a big pre-order for Microsoft stock and so the HFT guys are buying stocks at a lower price than that only to turn over and dump them almost instantly as the order actually comes through netting fractions of a penny.
Actually, this isn't what is going on. Their access to the trade flow doesn't let them see the market book (what would record the "pre-order"). Instead, they are looking for patterns in the limit orders representing large institutional traders trying to unwind their position (think mutual funds). Since these big players can't place an sell order for 10,000 shares, they break them up into smaller chunks using their own sell algos. If a HFT can identify these trades, they can jump in and buy ahead of the fund and sell to them. They are simply trying to outwit the other institutional fund's trading algorithms.
Disclaimer: I'm a finance doctoral student, and one of my colleagues actually does research into HFT using proprietary data
It is a price for doing business, just like stock broker commissions used to be. Since the top 1 percent of Americans have 40 percent of the wealth, the stock market consists primarily of the wealthy. If you are not good enough to play against the big, rich boys in the stock market, you shouldn't. Be best to settle for just buying and holding stocks for years on end.
Then don't put it all in the stock market.
Most "pensions" these days are actually something along the lines of a 401(k) plan. How would you suggest that he not put his pension in the stock market? Do you think he actually has a choice in the matter?
Dan Aris
Fun. Free. Online. RPG. BattleMaster.
The root cause behind HFT is
SEC rule 612
My advice is if you don't know the rules don't pontificate on the philosophy of the game's rules. You accurately listed several things that suck. I agree with you on your list and your interpretation of your list. Unfortunately your list has very little to do with why HFT exists.
Of-course the actual solutions aren't even accepted on silly public forums, and they are definitely not going to be accepted by the politicians
The SEC is controlled by private firms that control politicians, not the other way around. If you really want to destroy HFT, for whatever reasons, the way to do it is to convince trading firms that if you want sub-penny price discovery, you could continue the buildout of your rather baroque and expensive HFT infrastructure, or you could just tell your elected pawns in the govt to tell the SEC to modify rule 612 to force rounding to the nearest dollar or the nearest millionth of a penny.
If you round to the nearest dollar no one will ever (famous last words) accumulate enough capital to HFT. If you round to the nearest millionth of a penny then millions of dollars of infrastructure will only bring in fractional millionths of a penny times perhaps millions of trades per day or about a thousand bucks a year. Which compared to buying federal bonds at roughly 0 percent or soon to be defaulting muni bonds at -100% is actually not that bad of a return on equity, but anyway...
Either way the only way for HFT to exist is to set the quantum interval for trading to be "about a penny" which ... tada happens to be right exactly what its set to. I think the way the game's rules are set up precisely perfectly to maximize HFT profits does kinda indicate the people in charge of the market at the big firms want it to be that way, this is not some kind of weird coincidental engineering accident.
The only real long term effect of destroying HFT would likely be to heavily reduce the transfer of wealth from the FIRE sector to the telecom and IT sector. I'm not sure anyone outside the FIRE sector would benefit by that... I like having the FIRE sector crooks, in a small way, subsidize my IT and telecom service.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
civilization is not the turn based game to compare it to
this is
intellectual property law is philosophically incoherent. it is your moral duty to ignore it or sabotage it
pause. think. then post
intellectual property law is philosophically incoherent. it is your moral duty to ignore it or sabotage it
It's too fast when they sell off the entire market, but it's just fine when the market explodes upward and everyone makes a ton of money. So lets just put restrictions on selling but not buying. Why bother with a free market. Let's just control which way it goes.
Everyone is asking the wrong sort of questions.
What we should be asking: How secure are these HFT systems from outside manipulation? If I wrote a HFT system to manipulate other HFT systems...
Minne-snow-da: Winter is comming...
If you buy a share in any company, it means you invest in it. That means it makes sense you hold on to that share for a minimum duration. A month seems reasonable.
They can sell it in the blink of an eye, but only after they've held on to that share for a month. If they don't trust the value will remain stable enough for a month, don't buy it.
It would mean a share in a company is once again a share in a company. It means that people buy it because they believe in a company... not because a computer predicts a trend for the next 5 microseconds.
Agreed, HFT is about "tricks" not about "rational choices."
James Angel, a professor at Georgetown University and a member of the board of Direct Edge, said Mr. Arnuk and Mr. Saluzzi were stoking irrational fears of a market that is providing good returns to investors.
Oh, really? And just which investors would those be? Certainly not retail 401(k) investors.
The problem with the stock market is not that nobody is making money, the problem is a handful of people at the top are making a crapload of money and everyone else gets bupkis.
The big institutional traders have faster-than-lightning systems that limit their downside losses. By the time most people get their 401(k) statement it might as well be scribed on clay tablets dried in the sun, it's ancient history. Those people are the ones getting boned by the Math of Loss.
That's our life, the big wheel of shit. - The Fat Man, Blue Tango Salvage
They should introduce a very small tax (not sure exactly what rate would work) on every trade. Not just on shares but on bonds, commodities and any other financial instrument that's bought and sold on these markets.
People doing high-frequency-trading will have to slow down or stop because it will quickly become too expensive but the tax amount that would be paid by regular people buying and selling these instruments (e.g. to invest retirement money in) would be so small that it wouldn't be an impost.
It's too fast when a 0.001% per-trade tax would make it unprofitable ;-)
It's all grumbling of old losers.
Back in the day investment bankers, traders and brokers - all the fatcats who knew each other from private schools - met for launch and made business over Martini.
Now big share of their profit is snatched by bright kids working in funky offices, using top-of-the-line hardware, and all wearing shorts and flip-flops. No wonder the old guard is trying to lobby they out of the picture.
HFT by definition does not hold position for long, and therefore does not influence the long-term instrument price. And so-called 'average investor' is interested in the fact that the stock went from $18 to $36 over few months (or the other way around in the case of Facebook), not in the $0.2-amplitude intraday price jitter.
And all the scaremongering about flash crashes are exactly that: scaremongering. Each of these "crashes" lasted no longer than few minutes, after which stock price returned to the previous level. Once again: no impact for long-term investors.
Key question: when is fast trading too fast?
When it ceases to be trading and becomes gambling instead.
Basically, if you are looking at numbers and not meaning, you aren't trading anymore. Here's a suggestion for a totally impractical test: If you call up the trader in question and ask him what the company behind the shares does (i.e. which business it is in) and he has no clue, then he's not a trader, he's a gambler.
It seems to me that there's always been a significant element of gambling in the stock market. In excess it's a problem, but it doesn't have to be.
No, the problem is when it ceases to even be gambling, and becomes a sure thing. That's when you know that something's gone wrong. As I understand it, the whole point of HFT is to avoid the problem of actually taking any risk in the stock market, and making sure that the people running them can just make sure money at a certain rate.
That's waaaaay more of a problem than the gamblers in the stock market.
Dan Aris
Fun. Free. Online. RPG. BattleMaster.
what's going on is someone put out a big pre-order for Microsoft stock and so the HFT guys are buying stocks at a lower price than that only to turn over and dump them almost instantly as the order actually comes through netting fractions of a penny.
That would be "insider trading" and it's illegal.
The solution to this is to put a fixed tax on all stock trades. Make it unprofitable to buy/sell in this way.
No sig today...
The mainstream thought about markets in general, and therefore also the stock trading market, is that it is self-stabilizing. There are nice books about the nonsense of that theory, but HFT purely exist to syphon off the "correcting" movements of the markets. So even if the stock trading market were as stable as the theory said, it would just bleed dry under HFT.
Also, I guess (but this is a wild personal guess) that these automated traders are so big that they do not only react to fluctuations, but are capable of causing their own and then reaping the upward ripples.
Anyway, nothing of value is produced here. It is only a process being reaped. HFT is crime. Nothing less.
Nae king! Nae laird! Nae yurrupiean pressedent! We willna be fooled again!
That is not necessarily the key question since it's not just the speed of the trades that is the problem. The problem is that companies are spending hundreds of millions of dollars to build data centers to host applications that are responsible for high-frequency trading. These applications are unregulated and have already caused at least one flashcrash. In addition to that, the software is also responsible for a mistake to the tune of nearly half a billion dollars and the investment firm actually got that money back when your average investor would not have gotten anything back. In addition to that, there have been suspicions and allegations that companies are performing highly questionable and possibly illegal actions hidden in these blink-of-an-eye manipulations.
I'll admit that I don't know exactly what these companies are doing with HFT and that's precisely the problem. All I know is that they wouldn't be collectively spending billions of dollars on it if it wasn't expected to be extremely lucrative. What I do know is that at any given point in time there is a finite amount of money in the stock market. And if HFT gets trading companies more money, then that money has to come from somewhere and if it's not coming from other trading companies, then it must be coming from the investors. That is why I have recently stopped trading and I refuse to start until there is a serious investigation and possible regulations against HFT. Without such oversight, at the very least I feel that the game is being rigged against me and at the worst, they could make a bigger mess of this than the mortgage-backed securities debacle that contributed to the last crash.
The rate at which these decisions are being made indicates that it is not going through a human mind.
Why's that a problem? Index trackers don't involve human minds either.
I'm fine with HFT. My only conditions are:
1) No rollbacks for HFT trades[1]. You screw up you eat the loss.
2) If bailouts are needed for whatever reason (your company loses billions of other people's money), the traders involved (if any) and the bosses go to jail for 20 years.
3) The exchange only allows you to see what everyone else sees. No "peeking at other people's cards".
If they still do HFT with these conditions we might eventually see an improvement in algorithms, software quality and testing.
[1] Rollbacks are only allowed if it's not your fault e.g. the casino aka exchange screws up big time (slow downs don't count, going down doesn't count, exchange treating 1=2 counts, exchange treating buy as sell counts.).
The risks are to the public.
The rewards are to the 1%.
What am I missing here? More importantly, what is new? Perhaps the more this is repeated, the more people will realize what they are supporting and voting for.
This isn't news. It's an "awareness" piece. Useful and important.
This is probably the most interesting article about HFT I've read yet, also comes with lots of interesting graphs regarding the rise of HFT over the last six years:
http://nanex.net/aqck/2804.html
moox. for a new generation.
Businesses only raise capital when they issue new stock. Once shares are on the stock market, the business itself doesn't make or lose a single dime regardless of what happens to the share price.
Those trades certainly do 'mean something' to the people gaining and losing billions in the market.
But regardless, how many orders removed from a human mind does a trade have to be before you consider it meaningless? And how do you define 'not going through a human mind'?
My rather modest Etrade account has some buy and sell orders along the lines of "if the price of foo stock reaches X, buy/sell N shares". I might be staring at a ticker when one of those trades executes, I might be in a meeting, I might be on vacation. The trade doesn't 'go through my mind' other than when I set the rules for it, which might have been weeks or months ago. Why is it bad when someone else does the same thing but with a more complex set of rules?
I've also never seen any of the serious HFT players' trading algorithm, and neither have you. Neither of us know whether they are innovative. That some small number of HFT players have made some well publicised bad trades doesn't mean they all have that same problem. Nor does it mean that the algorithms that made the bad trades aren't 'innovative', just that they aren't perfect. These people are trying to not only model, but predict, a system that is extremely complex with a huge set of variables influenced by who knows how many orders of interaction, and is further dependent on human reaction to largely unpredictable events. That HFT doesn't ruin more firms is evidence that these people might be on the forefront of prediction science.
Obviously I can't really elaborate on algorithms, but suffice it to say your understanding is naive at best - you're talking 2004 type games.
Great so you can't tell me why my understanding of how HFT works is wrong and I'm talking about "2004 type games" which would explain why I read about automated trading algorithms losing Knight Trading $440 million two months ago? Tell me, all those protection measures and penalties, did they protect the company running the automated trading software or the parties who engaged with trading with the automated trading software?
This stuff is almost always blown out of proportion and you'd never read about the actual workings of the regulation and clearing processes which protect all players
"Protect all players" you say? So that would mean that everyone gets paid when someone screws up big time? Well, I bet they're learning their lessons. I think what you mean is that it "protects the big firms that are doing the HFT" while the market is just a big massive beast ripe for the skimming?
And when trading systems do go awry most exchanges have built-in and often automated undo not to mention penalties.
So, when I buy stock in Wal-Mart and my "algorithm" (my brain) was screwed up, where's my automated undo button?
This is a game where someone's loss is almost always another party's gain. There is no way to "protect all parties involved" with that sort of game. It's the nature of the goddamn game.
If you're just some guy taking the highest paying programming job, I'm not mad at you -- that's capitalism. But if you're actually running the show or defending your boss, you and I are basically at polar opposites. HFT doesn't provide anything and receives an insane amount of cash. Betting on arbitrages isn't betting, you're basically taxing everyone else little bits of money and just being a huge fucking leech.
My work here is dung.
Do you have shares in an HFT fund? No? Does your pension fund? ( Even if it does it soon won't because of Volcker rule)
So how exactly do you see yourself losing it due to HFT?
Of-course the actual solutions aren't even accepted on silly public forums, and they are definitely not going to be accepted by the politicians.
So I gotta ask: why you keep on posting? You're basically admitting that you're wasting your own time and money. You're not being profitable, or productive.
Hey, you're the free market capitalist here, while "we" are the welfare leeching sheeple. We don't have principles to be productive or profitable. You're the one here with principles to uphold.
Are you perhaps a masochists?
It's not cheap to be in the data centers near the sources of liquidity (the banks). I know, I saw the bill. The name of the game was SSD SAN's, fiber cross connects in the data center to the bank cages, and the fastest hardware running Linux you could get. The system is definitely skewed now, and technology enabled that. However, the markets are still suceptible to market event swings, and HFT is a very dangerous sport when you see how easily your code can kill your business.
As for private links for free, my former employer offered VPS's (vm's hosted in the same data centers) for their big name clients to get their trading stations as close to the action as possible.
ROFL. I should frame that comment if I were you...
It sucks for the day trading gamblers, but when you're buying stocks for the long term it hardly matters much. HAL9000 and Atari 2600 can trade shares with each other all day long for all I care.
You don't gamble if you can have a working market that gives you a normal return of about 5-6%.
Right, because mgmt which currently demands a ridiculous rate of return above the market would do a 180 if returns were higher and maybe demand a lower return than the market or something. If the market returned 5% you'd just end up with some exec trying to get 10% implementing HFT. I'm not buying your scenario.
I don't want to 'ban' anything except gov't manipulation of money.
Right and a HFT bashing discussion is a good horse to hang on to in order to push another unrelated agenda. An agenda which I happen to agree with. But I don't think your tactic is helping "our" cause very much. HFT has about as much to do with the unfree banking markets as it does with astrology or numerology.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
Was I the only one distracted by the lack of "to"s.
The root cause behind HFT is high level of inflation (money printing), artificial interest rates that are forced down to support inflation and thus the consumers, who are forced into the stock markets, which become gambling mechanisms rather than investment platforms.
The real solutions are shunned, the real solutions is to allow the people (market) set the interest rates, allow the people (market) choose what to use as money, prevent government from printing, from interfering with the economy, prevent gov't from deficit spending, ensure that all bonds pay actual interest rates, not fake ones, that support deficit spending, things like that.
Of-course the actual solutions aren't even accepted on silly public forums, and they are definitely not going to be accepted by the politicians.
You sound like someone who wants a nation that is long-term viable.
That's seriously out of fashion these days.
No, the trend for the modern era has been to have fiat currency instead of representative currency, surrender control of your money supply to an unaccountable group of private international bankers, still call it "government-issued currency" for that added appearance of legitimacy, and then to steal wealth from the lower and middle classes through the undeclared tax of inflation until collapse becomes inevitable. I guess after that, the powers behind the throne move on to greener pastures and then they wash, rinse, repeat.
The Federal Reserve would more properly be called the Third Bank of the United States. Oliver Wolcott and Andrew Jackson were kind enough to get rid of the First and Second ones.
It is a miracle that curiosity survives formal education. - Einstein
Most of us network and admin guys know how long things take. Pop quiz: with the "buy -> confirm" SLAs these guys have on their network, what is NOT taking place?
Schneier's "externality", indeed.
help me i've cloned myself and can't remember which one I am
You certainly showed him! *snaps the Z*
(/. moderation forces me to juggle these 2 accounts, otherwise I have to reply as an AC I don't want to).
Right, because mgmt which currently demands a ridiculous rate of return above the market
- you have two words there, that show your confusion.
One is 'currently' and the other is 'market'. Currently the inflation is over 11%, up to 15%, it varies. The management must have returns that are at least as high as inflation just to stay with it. That is specifically the problem with the money printing, which is the inflation that I am talking about.
The real interest rates in the market are sky high, they are nowhere near the zeroes, the artificial non-existent interest rates created by the Federal reserve machinations, buying of the Treasuries via the proxy-banks with counterfeit currency.
would do a 180 if returns were higher and maybe demand a lower return than the market
- Again, you don't understand the concept of a REAL interest rate vs NOMINAL interest rate.
MY OTHER COMMENTS
That was the original purpose of the stock market, but I'm not so sure that it actually plays out that way, at least for stocks. The primary reason for my skepticism is that once a company has sold its stock through an IPO, the company itself has little to gain through an increased share price. A higher share price means more money for the people who have stock options, but the company itself only benefits from the money originally raised through the IPO. After the IPO, most of the trading is done between investors and the company has little to no involvement. The stock basically becomes gambling chips with a corporate logo that you use to play a giant game of poker to attempt to win money from the other gamblers at the table.
Asimov made himself a similar question, but regarding time to dissolve resublimated thiotimoline. The answer is, of course, back in time. And may be not so different than the markets today, where predicting the future and trying to win money over that prediction is the game. Only is needed better prediction (and taking into account how it varies with your own moves, or the ones of all players using the same idea).
I see it as more of a high-end gambling. You're trying to make money, with money, hoping to outguess someone else. It's really not all that different than going to vegas and playing the poker table. If you can find a few suckers, and avoid being one yourself, you can make money.
All these people are doing is trying to speed up the process and make it easier to do. Some opportunities may only exist for a few seconds. Someone decides to sell when they shouldn't and causes price to dip momentarily. If you have automated systems in place you can take advantage of it better.
The problem of course is the computers can get really twitchy and cause shockwaves of trading to occur. My favorite thing to watch is how people scream about how all this money "just disappeared". Idiots. The money was never there to begin with. There was just an opportunity for money and now there isn't. Big difference. Money doesn't disappear, liquidity disappears. But that can cause problems for companies that are running closer to the edge. When there's a "crash", the money is just taken back out of the system. 100% of it CAME from the investors (the public) and for awhile some of it was in the hands of companies, selling stock is like getting a loan from the public. A crash just means people try to take their money back. They won't get it all back, the company has some of it and the public has some of it. No money disappears, you just don't see as much anymore.
It's all an illusion created by liquidity. It's like a group of three friends passing a $1 bill around. All three of them see $1 and get the impression that it looks like $3 since all three of them see $1. Until someone pockets the bill and the other two don't see it anymore, and start freaking out wondering where the other $2 went. A loss in liquidity makes people think (their) money has vanished, and someone must be to blame, and tends to cause a panic.
Same effect with stock. If you buy a stock from a company for $1, where's the money? They have $1 cash and you have $1 in stock. Does that mean that $2 exists in this closed system? NO. There was $1 and there still is only $1. If you turn around and sell your stock back to the company, you have $1 cash and the company, well their own stock isn't worth anything to them unless they can sell it so they really have nothing. So now we went magically from $2 to $1 as a dollar disappeared? NO.
I work for the Department of Redundancy Department.
You are right about that, long term investments don't care about this stuff but the thing is HFTs still act like leeches, sucking energy (i.e. money) out of the system by producing nothing. I never understood why an investor needs a response time faster than 1 second.
ics
But I don't think your tactic is helping "our" cause very much.
You assume he's actually trying to further "your" cause.
He already said his solutions won't be accepted. He has already given up. I'm not going to say for sure what his reasons for posting are, but I can say it's probably not about promoting more freedom or capitalism.
... Heisenberg's Uncertainty Principle. Don't observe the price too closely.
now we need to go OSS in diesel cars
Since the annual value of derivatives trading is approximately 7 times the size of the annual world GDP( http://xkcd.com/980/huge/ ); and since money is so tight that governments are enacting austerity programs in an attempt to reduce costs and pay debt; and since our infrastructure is falling apart because of lack of funding we should institute a time-based tax on securities and derivatives trades. Tax such that these lightning fast trades are so heavily taxed that they become valueless and tax such that long term holdings are almost not taxed at all. Long term investment is good for the economy and for society. Wall street gambling is bad for the economy and bad for society.
-- QED
I've played enough games of Civilization to know that what Wall Street needs is a turn based system. You tell it all the trades you want to do, and every minute it updates all the trades submitted.
This is so wrong. The reason it is called an Initial Public Offering is that there may be other public offereings, later, when the company decides to sell more of its stock.
The real "Libtards" are the Libertarians!
Why is it that a majority of readers here seem appalled at the fact that technology is being applied to solve tedious problems like trading, which are obviously better automated than performed by humans? Yes, I do know what I'm talking about, I've worked for some of the top firms as a trader myself. I don't see the same negatively biased comments when Google wants to automate car navigation, for example.
Trading blocks of shares or other vanilla instruments is a time consuming, multivariate problem for which computers are better suited than human traders. It is still humans who either make the decisions that they want to buy or sell in the first place, for example based on fundamental data, macro economic hypotheses, or simply to hedge (insure) existing investments or at the very least it is humans who decide on the conditions under which an algorithm should automatically buy or sell. The latter part is similar to an ABS system in a car, which automatically kicks in when the right conditions are met.
The answer is not to restrict computers from doing their job, the answer is for Mr Saluzzi to deploy a computer to work his orders. Every institution today offers this service and if he decides not to use it then he must also deal with the consequences (positive or negative). Instead, his argument is more like saying: "Everyone has a smart phone but I don't, so I am unable to see a live map of where I'm going, which is a disadvantage for me; let's outlaw smart phones!".
Of course it is also a joke for a PR hungry pseudo scientist like Ms Aldridge to represent the other side, since her understanding of high frequency trading is quite superficial, as is easily verifiable by reading her book (which is even worse than Mr Saluzzi's work).
It would be nice to have a microtransaction tax, but it wouldn't solve the problem. Firms would just move their money to China where there are no taxes on transactions. It is a bit like the internet. The more rules you have, the more people would move away from you.
Some firms post a million buy-sell orders a day, but only execute a few of them.
It's more like ticket scalping. But ultimately the investor makes less profit, that profit is siphoned off to the HFT traders, and traders using the island markets, the ones that buy/sell promises to buy the stock on the real market its traded on.
This is also why taxes on stock trades won't work, because they can trade promises for free on other markets. If you tax those other 'promises', they'll trade contracts to sell promises outside USA.
This is also why 'hold for 1 month' won't work, because they can sell a promise to sell the share at the end of the month instead to get around it.
Really, recognize it's a rigged market, and invest your money in local businesses. Forget the US markets.
Also European markets often have a delayed price feed for ordinary investors, and real time for HFT & traders. So the market itself is design to work against the investors and let them be ripped off by the traders. I'd steer clear of those too.
Trading ceased to mean anything a long time ago. The idea of stock ownership is that the person owns part of the company, which means ey ought to be knowledgeable about the company and should put some work into improving the company to increase the value of eir stake. Even before high frequency trading, trading was nothing more than gambling on numbers on a ticker. How many stocks do you own? How many do you own that you know a damn thing about?
Considering it pragmatically over the long term, trading is too fast when it amounts to betting or surfing rather than investing. Day trading and high frequency trading is not what public trading was intended for. It was designed to raise money for product R&D, and in exchange the people who fund the development will (hopefully) reap a return, either in a greatly increased share price down the line, or in the form of profit sharing (dividends). High frequency trading benefits only the brokers and a very select few "investors"[sic], and over the long term is bad for our economy and bad for our nation, because we have long ago forgotten the value of hard work, betterment of our nation, and improving things as a whole for everyone. It seems like everything is now born of a sense of an entitlement: "Gimmegimmegimme!" and nothing more.
The baby boomers have ruined everything for us, and for future generations. Thanks, guys.
Pathetic.
The Christian Right is Neither (Christian nor right). See: Matthew 23, Matthew 25, Ezekiel 16:48-50
I agree with most of your post except for this:
That was the original purpose of the stock market, but I'm not so sure that it actually plays out that way, at least for stocks. The primary reason for my skepticism is that once a company has sold its stock through an IPO, the company itself has little to gain through an increased share price. A higher share price means more money for the people who have stock options, but the company itself only benefits from the money originally raised through the IPO. After the IPO, most of the trading is done between investors and the company has little to no involvement. The stock basically becomes gambling chips with a corporate logo that you use to play a giant game of poker to attempt to win money from the other gamblers at the table.
This is spot on. The problem is that too many people in the media, politics and the general population still think that the stock price is a reliable indicator of the actual financial health of the company. These days it's more likely just the outcome of whatever algorithms the automated trading systems are using.
Who said that I want to "destroy HFT"? Where does that come out of? It is a market decision what to do with HFT, the reason that the HFT are taking over though, is a response to the free money that is provided by the gov't to the banks and thus various 'investor' firms to gamble with. The reason people gamble with money is because it's not real, it's fake. You don't gamble, you don't take crazy risks with your actual savings. Also you don't gamble if you don't expect to be bailed out
All the people who've gone to 'Vegas and lost their shirt (or at least lost money they couldn't afford to lose) disprove your point.
no taxation without representation!
The submission is actually about ad harvesting by a blogger linking to NYT article written by someone who know nothing about subject matter for the sole purpose to gather eyeballs in first place. /. is completely beyound me.
How this amounts to "news" or anything remotely worth putting on
Mon dieu! A level-headed Libertarian? I may not agree with your agenda, but you get points just for not being crazy.
Oh yeah, after Conspiracy Theory has been trashed and flip targeted as domestic terrorism, this is where were at.
The new nsa symbol should be a sledge-hammer and rock, their motto, "let them scratch, as long as they piss their pants"
"If you round to the nearest millionth of a penny then millions of dollars of infrastructure will only bring in fractional millionths of a penny..."
This is not quite accurate. I'm not sure, but I think you meant trading at the level of millionths of a penny price difference. They are not the same thing. You can take any amount at all and round it to a millionth of a penny. That would make absolutely no difference.
I've never understood why they needed a response time faster than a day. Seriously, set it up so you can only trade shares once a day. It wouldn't change a thing for normal investors but it would obliterate this algorithmic crap.
you mean like the SEC fee on all sales that's already in place?
Wave upon wave of demented avengers March cheerfully out of obscurity into the dream
There is some evidence that market pricing is fractal (scale-free). There is also evidence that it cannot be explained adequately by a single fractal, but that the fractal shifts over time scales. It would seem to me that you should start at the longest reasonable time scale (decades) then zoom in and see where the mono-fractal picture starts to break down -- that's the point at which trading it "too fast". The idea is this: when time is long it's people making decisions about things that influence people; at high frequency it's computers shuffling socially irrelevant numbers. The break down of the mono-fractal description could tell you where the transition between the two lies; we want to be on the human side of that.
"The Federal Reserve would more properly be called the Third Bank of the United States."
Not really. It would more properly be called the Third Reserve. There is nothing Federal about it, except that the Chairman of the Board is appointed by the President. It does not "belong" to the United States. The Fed is a collection of private banks, including a great deal of foreign interest.
That would be "insider trading" and it's illegal.
Front running, to be precise.
The solution to this is to put a fixed tax on all stock trades. Make it unprofitable to buy/sell in this way.
Ah, another Tobin tax advocate. Sorry, but it'd be a matter of days, if that, before the volume of trading moves to London, Singapore, HK, or any up-and-coming jurisdiction which thinks it'd be in their interest to take business away from the exchanges which suffer under your tax regime.
This is not hypothetical, or hyperbole: Sweden, for instance, tried to introduce such a tax on equities, and also on some fixed-income securities (bonds). The equity tax returned less than 6% of the anticipated take, and that was promptly eaten up by the concomitant drop in capital gains tax. As for the bonds, the bulk of trading moved to London within the first week or so. Unintended consequences and all that.
And yes, I know it's not that easy for companies to re-list their shares on another exchange. But it is easy to trade derivatives on those companies instead: options, CFDs, SSFs, etc. etc.
I have to agree with eldavajohn.
I am not an HF trader but I am a software engineer, and regulation is not going to help very much in this field. Sooner or later two or more firms are going to get caught in an indirect loop, causing a destructive price war, or something of that nature. It's pretty much inevitable. In fact it has already happened, but only in small degree.
You can't regulate around that unless you try to regulate every line of code, and I think we all know that won't work either.
Unfortunately none of your conditions are being met right now, in fact just the opposite.
A bigger issue of one of societal dependence. As a society we have become dependent on the stock market. Entire government policies are built upon it.
Rather than the stock market being this private business to raise capital for other businesses, it has become something society and government have deemed an essential. Entire policies are based around making sure the stock market goes up or growth occurs or certain people make money.
Inflation is also pretty much mandated by the government so you NEED to invest in the stock market or others just to keep the value of your money. I'm not advocating any return to gold... just stating reality.
In the end, assuming no big events, this is really a tax on investors. Not much different from sales tax. Someone skimming a little off the top.
I don't say that in a vastly derogatory way. All systems have an entrance fee. Government or private.
It would be one thing if the stock exchange was just another private business. Then these traders could game each other all they want to their hearts content. Compete sending bits and bytes for no reason. I'd just stay on the sidelines as I stay away from Casinos.
But as I said, they are not just another private business. Government policies demand you take part in this business. To do so is to your extreme detriment.
This is rather common in recent years. I'm in Ontario, Canada and I see the insurance industry very much like this. We have some of the highest auto-insurance rates. A lot of it due to fraud and mandatory benefits. Sure, i don't mind mandatory insurance in case I hit someone and they need to be made whole. Yet, I don't want the statutory benefits assigned to me (income replacement, private healthcare providers...) In the end so much of the system is a fraud with private medical providers and scam artists... but we have no choice but to partake in it. I can't opt out of the mandatory benefits.
It's more and more about what algorithms your "opponents" are using and what your algorithms are set at.
Only if you are in it for day-trading profits. And if you are, well, you deserve to be beaten senseless by some HFT algorithm.
If you're a long term investor, with a time horizon of many decades, this doesn't matter. For example, I have a stock I bought 15 years ago. It has gone up by around 3X in that time. HFT makes no difference to me when I've held a stock over many years or decades. The exact microsecond it sells doesn't matter to me after a period of decades.
The fundamentals are driven by stock valuations, which are based in what people guess about the future of the company. You can be as informed about that as anybody. If you believe a company will do well over the long haul, buy some of their stock. Don't worry about HFT. You don't have to microsecond-time your sale and beat some other HFT algorithm when you've made a lot of money over years, rather than little bit over seconds.
It's more and more about what algorithms your "opponents" are using and what your algorithms are set at.
Only if you are in it for day-trading profits. And if you are, well, you deserve to be beaten senseless by some HFT algorithm.
If you're a long term investor, with a time horizon of many decades, this doesn't matter. For example, I have a stock I bought 15 years ago. It has gone up by around 3X in that time. HFT makes no difference to me when I've held a stock over many years or decades. The exact microsecond it sells doesn't matter to me after a period of decades.
This is a good point. But then the question becomes: what good does HFT provide? A lot of smart people are sucked into that sector because of the money, where they are arguably causing a net loss to society by participating in an arms race that does not produce any real goods or services. Those smart people could in principle be contributing to research and development in areas that actually improve everybody's standard of living, such as medical research and robotics - or perhaps even in economics when it comes to analyzing long-term successes (after all, genuinely improving the capital allocation in the long-term could be beneficially to society, unlike the short-term gambling that is happening these days).
With that in mind, there needs to be a discussion on how best to disincentivize this kind of extremely short-term behavior, where it is via transaction fees or via trading on heartbeats.
The stock market is about people being able to buy and sell securities that allows businesses to raise additional capital. It was originally a very social thing so much so that it could reflect the mood of the populace's strength and development.
An IPO is a business raising additional capital; everything else after that is psychology, almost the second thing you said. The stock market is about none of that though; it's about person A swindling person B out of their money.
The stock market shows the opinion of the market's major buying and selling power on a security. The security starts to slow and peak when the minority are the only ones in the buy-buy-buy cycle. They're out there screaming "BUY BUY BUY OMG GOLD IS GOING UP IT'S GOING TO HIT LIKE $10,000" while gold is stalled at $1800 and has been for months. Gold climbed steadily to $1600, then tapered off and slowly rose to $1800 while the smart folk continued to slowly sell theirs off to these idiots. Soon, gold will fall, but these folks are going "BUY GOLD BUY GOLD GONNA BE RICH!" and the other half are going "Hedge against inflation!" When the price starts to drop and there's no big money interest, it'll slowly start to go down. Then, everyone will panic as they realize gold is slowly devaluing and they'll start SELLING to people who think gold is just following a natural slump, a calm before climbing like crazy. Or maybe, selling to people who just think "gold is good to buy" and then start panic selling themselves when gold they buy starts dropping.
In any case, when none of these people can offload their gold, they start dropping the price trying to offload it. Gold rushes down quickly as people buy into the "deals" at $1500 (man gold was just $1800, it's dipped, I'll sell this back 'cause it's gold it's gotta come back!), $1100, $900 (man it's lost so much, it's gotta come back), and so on. Eventually it settles in and gets bought up by big interests again, slowly climbing as the market trades it around.
Stocks work this way. Bonds are complex, but essentially the same (a 5% bond sells for its face value plus the interest it'll gain, really). And so on. Why would you retire on money you've stuffed in the stock market? "Oh I'll buy into the market, the market grows" right... the market is people like me robbing you.
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Someone told me that 1) is implemented already.
Without the conditions I state, HFT would not actually be trading but just a fancy way of disguising the transfer of money from nonHFT/nonfavoured traders to favoured HFT traders.
After all I can easily make money in a casino/market if:
1) My big bad bets are rolled back
2) I get a bailout (and keep my bonus +commisions) if I screw up really big time - betting using other people's money!
3) I get to see other people's planned moves before their move takes effect AND change my mind accordingly.
There's only one thing to understand here: Private firms perform HFT and private firms would not do something that did not make them money. Private firms' interest in HFT is not to waste millions of dollars putting in crazy infrastructure just to help day traders strike it Romney Rich; their interest in HFT is to pull more money from everyone else in the stock market into their own coffers.
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Because the stocks are no longer about the actual worth of the company. Shorting doesn't change anything for the better, it's not more accurate, it's fucking gambling you fool.
It's just as much about the worth of the company as buying long is. Companies values go up and down so it makes sense to be able to trade based on the expectation that it will go either way. Buying long is just as much gambling as buying short. The only difference between buying long and buying short is the order in which you buy and sell. They are effectively identical transactions otherwise.
ALL stock trading is speculation. Anyone who claims otherwise is either a fool or a liar. And any trade in a stock is by definition not a trade in the profits of a company. The underlying asset (the company) is not actually tied to the value of the stock. There is a tendency for stocks to reflect the value of the company but there is nothing forcing them to anymore than the value of a baseball card is reflected in the batting average of the player it pictures.
For someone to win, someone must lose. The stock market is transactional, money comes from the mindless and goes to the shrewd.
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15 years to triple your investment? man that sucks. that hundred dollars you spent on stock could have been used more wisely.
But the fact that the stock market exists makes people more willing to buy stock when the company is issuing it. Most people would be quite reluctant to invest in a company if they had no idea how they could sell out later.
Is 1563649 a prime number?
The companies always have the option of issuing more shares. A higher share price means that they'll net more from that.
Is 1563649 a prime number?
1) is conditionally implemented.
there are rollbacks, just not everything and not always..
as someone else already commented here, the conditions for hft to be practical profit engine are generated by the same people who sell low latency access to the stock exchange...
world was created 5 seconds before this post as it is.
The problem with #1 is that they're not gambling with their own money, it's ours.
I've got a prediction going, and am waiting to see how correct I am.
Once quantum computing becomes more of a reality, once it's discovered how to accurately, repeatedly send data across long distances instantaneously.... the absolute, very first place this will be used (in a non-military manner) will be the stock market.
Why have microsecond or even nanosecond trading, when you can have it instantaneously (or I guess attoseconds or something, as the receiving computer thousands of miles away has to still process what it receives).
You start the day, holding some stock. The market swings wildly up 10% down 20% and back up 15%.
Q. How much have you made/lost?
A. Nothing.
The problem with your logic is that at some point you are going to want to buy or sell. If the price you get is artificially weird then that hurts investors. Even buy and hold investors at some point need to buy and eventually to sell. Furthermore if a stock is volatile then that can influence the behavior of the management of the company in ways that may not be optimal for the investor. CEOs can lose their jobs if the stock price dips too much so you better believe they pay close attention to the price of their shares and act based on that information.
I work in the industry, and some of you may be interested to hear that it is getting less lucrative. Some pretty well-known names have had layoffs within the lass 6 months.
It is hard for HFT firms to make money when trading volumes and market volatility are down, as of late. A huge proportion of HFT equity trades are "liquidity providing", which is a technical term meaning they have left a standing order out there and someone has crossed the bid/ask spread to trade with them. This lets them capture roughly half the spread, plus a small "provider" credit from the exchange. Few trades means few spreads and few credits.
I'll end by saying I do not see HFT as a problem. The old days, with humans, forced retail investors to pay huge bid-offer spreads over 10 cents a share. These days about half the US equities trade just a penny wide, meaning that your typical retail investor is paying about half a penny to an HFT firm rather than 5 pennies to a NYSE floor specialist. That seems like a good thing to me -- those specialists were not exactly charity cases.
And this is precisely the problem: heads you win, tails I lose.
Forget magic. Any technology distinguishable from divine power is insufficiently advanced.
and had humans doing what the program do, it would be illegal.
The Kruger Dunning explains most post on
Posted before, but worth reviewing in light of this discussion:
http://www.nanex.net/FlashCrash/OngoingResearch.html
Ideally, everyone would have a crew of expert such as yourself to help manage their funds. Can you please explain what the difference would be between this ideal situation, and no one having these tools available to them? What value do you bring to the larger picture?
I would completely agree with this. Can anybody explain the downsides to this proposal?
Sooner or later two or more firms are going to get caught in an indirect loop, causing a destructive price war
"Buy low, sell high" prevents that recursion.
When all you have is a hammer, every problem starts to look like a thumb.
I agree with you, but there is the caveat that it is quite common for companies to own quite a lot of their own stock. So a stock price rise is beneficial to them.
You are so right because there hasn't been any hft screw ups in yrs. knight capital? Check NANEX for all the screw ups.
You are so full of shit, trying to justify your pathetic existence.
Its probably too late to comment on this, but just a minor point; A company's valuation determines its ability to access the credit markets. A higher stock price means the company is probably going to source debt at better rates than a similar company with a lower stock price. Company's do care about stock price.
Who's to decide what's "good" in a free society? HFT may be no better than gambling, but as long as we're free not to engage in it it's simply caveat emptor.
Goldman&Sachs would go belly up in a week. So yeah, no downsides.
That's where #2 comes in.
....now it is properly referred to as ultra-high frequency trading.....that cat is waaaay out of their bag. Same category as LIBOR manipulation, the DTCC's Stock Borrow Program (SBP, for naked short selling), unlimited number of Credit Default Swaps' purchases, unlimited number of commodity futures contract purchases, unlimited number of investors per hedge fund, etc.
With QEI and II, plus what ever they pump out next, they are transferring their private debt onto the public with all those purchases of toxic assets (junk paper), allowing for more generation of the latest junk paper, used in their charade of pumping up the stock market --- it's all a hologram, like Max Keiser says.
I've always believe the easiest fix is reinstate a per order charge. This will stop HFT from dumping massive numbers of orders and executing a tiny percentage. HFT will have to create a much better strategy to ensure that they have a high chance of a match before sending an order.
The thing is, there's no proper speed. None.
OTOH, there are definitely improper speeds. My idea is that there should be a floating tax rate on stock transactions, that increases with the speed of the transaction. I think it should hit 100% at around a microsecond, and 0% at 5-20 years, and scale logrithmicly in between. (OTOH, linearly would be simpler to understand and implement, so maybe that would be better.)
Perhaps linearly is the correct answer, since if you are doing fast trading, the taxes would be cumulative, so there would automatically be a compounding to cause you to avoid them.
N.B.: I'm allowing you to trade at any speed you desire. But I'm giving investment a real advantage over gambling.
I think we've pushed this "anyone can grow up to be president" thing too far.
Same effect with stock. If you buy a stock from a company for $1, where's the money? They have $1 cash and you have $1 in stock. Does that mean that $2 exists in this closed system? NO. There was $1 and there still is only $1. If you turn around and sell your stock back to the company, you have $1 cash and the company, well their own stock isn't worth anything to them unless they can sell it so they really have nothing. So now we went magically from $2 to $1 as a dollar disappeared? NO.
Wow, this is a terrible explanation. At the beginning you have $1 and the company has $1 worth of stock. Total value of the system is $2. They company sells you it's stock, now the company has $1 and you have $1 worth of stock. Total value of the system is $2. If the company does a buyback they have $1 worth of stock and you have $1 cash. Total value of the system is $2. (BTW the stock isn't 'worthless' to the company anymore than it is worthless for anybody else.)
The idea that money 'disappears' comes from the potential for the value of the stock to decline. Suppose the above stock falls to $.10. Now the total value of the system is $1.10. Ouch, we lost $.90. Where did it go? The answer is it depends. Why did the stock fall? If the stock fell because something changed with the company the 'money' (in case really wealth) has been actually lost. Maybe the company used your $1 to invest in a new product nobody wants or an earthquake swallowed their factories or the price of their raw materials skyrocketed, etc. If the stock fell because of forces outside the company, e.g. an exchange-wide panic, then no actual wealth has been lost. In which case the stock is simply undervalued and will likely come back. A good time to buy.
Another thing you said which is totally wrong is that a company selling a stock is like getting a loan from the public. It is no such thing. It is a sale not a loan. There is no expectation of it being paid back. There is no interest (are dividends confusing you?).
It seems as if you would have the markets swinging wildly based on people's moods.
Yes! I would. Your market Prozac is taking money out of our pockets Einstein.
Return Wall Street to be investment-oriented from trade-oriented. A 15% capital gains tax is too rewarding for a gain on stock that technically never makes it to the company it was supposedly and "investment" in, and thereby promotes trad-centered behavior.
How? By adjusting capital gains income (earned investment income) tax according to how long it was held:
less than 1 sec = 99%
1-5 sec = 98%
greater than 5 less than 30 sec = 97%
less than 1 min = 96%
less than 5 min = 95%
less than 1 hour = 93%
less than 4 hours = 92%
less than 1 day = 90%
less than 1 week = 85%
less than 1 month = 80%
less than 6 months = 70%
less than 1 year = 60%
[...]
greater than 10 years = 15%
and finally, and probably MOST important: make it Last In First Out - the most recent stock sold is the most recent stock bought. Pop the stack. Otherwise after 10 years it's right back to where it was.
When a world event wipes out your portfolio and you're unable to trade out of it for a day, you will change your mind. In the process your wealth will be transferred to countries without foolish limits like this. This is a very dumb idea.
That could very well be true, but I would hope that stock price is only one of many factors that determines the amount of money and the interest rate that the company could get. In fact, I would hope that the stock price is not valued much at all in that decision since a large group of idiots with more money than brains could buy into a company for much more than it is worth. If I was lending money, I would much rather see that the company I was lending to has actual assets that could be used for collateral as well as a steady trend of growth showing that they will likely be able to pay back the loan. But that's probably why I am not a banker.
Lots of things happen during trading hours. FDA approves/denies your drug. Some inside-trader-wannabee leaks your company's earnings before the conference call. Your robots run amok like Knight Capital's did. Some asshats fly planes into very tall buildings. An earthquake happens and knocks down the not-so-tall buildings that happen to contain your factory. Some other asshat politicians pass a law that completely changes your regulatory environment (health care, insurance, mining). An asshat's oil well blows up, shutting down all drilling in the Gulf. Hurricanes show up and wipe productive assets off the map.
Once a day isn't frequent enough to capture all the things that happen during a trading day. Once-every-second trading ticks should suffice for most human purporses.
It is called "Federal" because there is more than one reserve - NY, Chicago, St. Louis etc.
You guys being able to "undo" when you screw up is a good thing? And I don't have that option, why?
Go fuck yourself.
+1 for spelling "populace" correctly!
Except HFT'ers ARE contributing to research and development in all kinds of technological areas. Better networks, faster connections, bigger pipes across the ocean...I heard some companies were looking into using neutrinos to communicate through the earth.
I see it as more of a high-end gambling. You're trying to make money, with money, hoping to outguess someone else. It's really not all that different than going to vegas and playing the poker table. If you can find a few suckers, and avoid being one yourself, you can make money.
You have been suckered. This is not the above. It is a Ponzi sceme - these people are not gambling their own money, they are gambling someone else's and get a percentage of both wins and loses The faster they go, the more times they take a percentage. There is NO commercial benefit, there is no social benefit. Its a scam. These people should be in jail, but they have friends in high places.
This is the same scam that caused the rpesent recession, (perhaps wearing a different dinner jacket)
Sent from my ASR33 using ASCII
Which is in of itself hilarious. What exactly is that valuation based upon? It's certainly not price/book or price/earnings or the DOW wouldn't be above 13K right now.
I would be very curious to know how these robots decide to speculate because it smells highly like a combination between insider knowledge of future trades (ex. knowing what mutual funds are buying/selling what before it happens) and old fashioned pump and dump.
Long term investing still works, but if you buy at the top of the market (such as say, now-ish) good luck netting any profits for quite a while.
Not if you do it through the public market data but before the other order makes it through. Insider trading is when your uncle calls to tell you about his company's new product launch so you can make money on it.
Wow, you pointed a finger, directed blame and attention, and rambled on about a bunch of rubbish. You must be proud of your MBA and shiny office.
captcha: corrupt
HFT is gambling, than it should be illegal unless the stock exchange were set up in say Vegas, or Atlantic City.
The main downside is a reduction in market liquidity. Right now, you can unload almost anything instantly (unless it's a particularly large order). But that's not generally an issue for retail investors since they don't need instant liquidity anyway. It would also hurt the bottom line of the big trading firms as they use this as a way to generate guaranteed profits. But I'm cool with that since there shouldn't be any guarantees in life. They can find other ways of screwing people out of money and they're quite good at it.
Are agnostics skeptical of unicorns too?
I was an average Joe at a public company. My compensation included stock grants -- The company absolutely gained when the share price increased: My total compensation package increased at no cost to them. Further, my increased compensation meant I was _less_ likely to ask them for a continuing cash payout.
My company also used their stock to purchase other companies. When the share prices were high, they were able to purchase other companies with less dilution and with a smaller cash payout.
That's just two simple examples.
The argument in favour of HFT is that what it essentially provides is arbitrage. It only works so long as someone is doing something 'wrong'. It's like arbitrage of sporting odds - it only works so long as different bookmakers are posting different odds, and clearly, one of them must be 'wrong'. Arbers ultimately act as a force that tends to result in more accurate odds being posted. In theory, high frequency traders should, over the long term, act to iron out inconsistencies in prices.
Remember, HFT is a _relative_ term. I mean, you could look at trading stocks over the telegraph rather than by sending a letter to your broker as the HFT of 1855 (or whatever the correct date is, I don't know exactly). Ultimately that led to more 'rational' markets, because significant time delays in trading can obviously lead to some fairly weird results, like people buying stock in a company that went bankrupt the day before or something. Really, HFT theoretically ought to have the same effect, just on a much smaller scale.
I'm kind of in agreement with the OP that it's easy to overblow HFT as a problem. As long as the things being traded have a direct and obvious relationship to real economic transactions, it's fairly obvious when HFT is doing something ridiculous, and it gets quickly corrected. I think the OP's correct that HFT really isn't a problem to a truly conservative investor, who is investing long term on the basis of corporate performance. It's really only a problem for those who are day trading, trying to make money by taking advantage of imperfect investment decisions by others. In other words, the only ones who are hurt by HFT are people who are doing the same thing HFT traders are doing, just not as _well_. They don't necessarily deserve much sympathy, and making things better for them probably won't result in magic improvement in the economy or anything.
There's nothing wrong with group ownership and representation.
I suppose you want me to say I own shares in lots of companies and know nothing about them, but that isn't really true. I have very fractional ownership of a few mutual funds. Your average person with money in some kind of fund doesn't actually own any shares. The fund owns the shares and is responsible for them. As an average joe investing in funds, you're simply saying 'I have decided to trust this body to know about companies and buy shares partially on my behalf, instead of doing it myself'.
The big institutional investors certainly *do* know an awful lot about the companies they invest in, and take an active part in monitoring the running of those firms. They do so on behalf of their clients.
This really isn't a crazy system. We use it for lots of other things. Modern life is complex. You can't know everything about everything. We have evolved various neat systems whereby we are able to each know about different things, on each other's behalf. Overall, it seems to work a lot better than each human trying to know everything all humans can possibly know. That ceased to be possible somewhere several centuries back...
"Buy low, sell high" prevents that recursion."
No, it doesn't. That's all fine when stock trading is done in the slow, traditional way, and values go up over time. It isn't the case when you are doing "High Frequency". In essence, it looks for any small advantage and takes it.
In other words: you often have to assume that somebody out there is willing to pay just a fraction more than you did, pretty soon. So you raise your price 1/1000th of a penny higher than the next guy's.
But somebody else is doing the same thing. And their price goes up 1/1000th of a cent higher than yours. And so on. Back and forth like that half a million times, and your stock price is now up $10 over what the rest of the market will pay.
Don't laugh. This happened on Amazon recently, when two book sellers used software to set their prices just the tiniest smidgin higher than the next highest price. After a few days the books had a list price of well over $1 million.
Darn it, I hit "submit" too soon.
Obviously smart software should be aware of such things, but with all the HFT going on, it's not a case of just two parties. There is very real danger that an indirect recursion could happen, in ways the software won't detect.
All the government needs to do to stop these financial leeches is to tax Really Short Term Capital Gains at a higher rate than normal gains.
Only if you are in it for day-trading profits. And if you are, well, you deserve to be beaten senseless by some HFT algorithm.
If you're a long term investor, with a time horizon of many decades, this doesn't matter. For example, I have a stock I bought 15 years ago. It has gone up by around 3X in that time. HFT makes no difference to me when I've held a stock over many years or decades. The exact microsecond it sells doesn't matter to me after a period of decades.
Let me ask you something. Would you recommend homeowners ditch their fire or title insurance then? Because you have about the same chance of getting burned when the time comes when you need to sell that stock, as you have of a major fire. Might as well save on the premiums.
Seriously. I've talked to quite a few people who have been caught up in an "event" where they had to sell (for tax reasons, for financial reasons, etc.) and they just happened to pick the wrong moment of time to trade. And there have been thousands of such "bad times" so far this year.
From a recent post I made
How High Frequency Trading Harms Even Long Term Investors
The limitation is that provided you hold sufficient shares, you can buy and sell shares with impunity since the shares you buy are deemed to be different from the shares you sell. The shares you sell are always the ones you've held the longest.
For example, if I hold one million shares in a particular company and trade in lots of 100, I can carry out 10000 buy and sell orders on a given day before I run into the one-day limit.
If HFT traders don't hold enough shares themselves to circumvent the rule, they can just borrow from (or partner with) someone who does.
It makes a difference for corporate actions like capital raising and leveraged acquisitions.
A high share price is defensive against being bought out.
A high share price keeps investors happy. Unhappy investors could kick out directors, refuse to participate in capital raisings, etc.
A high share price directly benefits employees and directors who hold shares or options, and make decisions on behalf of the company.
A level-headed Libertarian? I may not agree with your agenda, but you get points just for not being crazy.
Who were you replying to or referring to? Roman_mir / udachny is anything but a level headed libertarian. He is a religious zealot on an unending mission to convert the entire world to his belief system.
Yeah, I always thought that (LIFO/queue order) was a ridiculous approach to book-keeping. It's not like shares "go bad" like produce or commodities. Effectively it means large funds and rich individuals can day-trade stocks while paying long-term capital gains (~15%) because they can limit annual turnover/volume to a fraction of their holdings... but everyone else gets the short-term capital gains (=marginal income tax, something like 33%). If profits/losses were booked FIFO (stack order) then taxes due to trading would be independent of the capitalization of the trader... a.k.a. in favor of the little guy.
You confused yourself by talking about "price" instead of "bid" and "ask". Presumably when you say "price" you must have meant "ask" because raising your bid over their ask must surely result in a trade. But raising your ask over their ask will just as surely not result in a trade (because if there is any trade it will be at the lower ask). So there is no recursion.
Indeed, spikes to appear in price histories with no apparent explanation. But the cause is not nearly so simplistic as you imagine. And these don't require high frequency trading, another word is "bubble". With high frequency trading, bubbles just build and pop faster. And they are rare. The normal behavior of a high frequency market is a random walk just like a traditional turtle market. The main difference is, the spreads are tighter. It's hard to see why that is bad.
When all you have is a hammer, every problem starts to look like a thumb.
Use marketable limit orders (i.e. sell order with price set a reasonable range below the current bid, so expecting immediate execution unless something goes crazy) or stop-limit orders for an orderly sale. Don't use market orders. Don't use stop-market orders. You'll only trade at a bad price if you send an order that permits trading at a bad price.
With the exception of the short-lived "flash orders", once you see an order displayed on public market data you cannot front-run it. It's already at the exchange. You can join it, or trade against it, or post your order at a more aggressive price, but there's no way to trade before it on the exchange without making a price sacrifice.
The purpose of the market is to provide liquidity. At any given moment, you can login to Etrade and buy or sell immediately. If you're only allowed to do that once a day, the number of people willing to trade with you at that moment would be far fewer than without the restrictions. The smaller the pool of traders, the larger the "spread" -- the difference between the buy and sell price. Since the introduction of high frequency trades and cross-exchange trading of stocks, the spread has narrowed to a single penny.
If you propose that everyone in the world or in a country are only allowed to trade at one particular moment, regardless of how fair it is to various time zones or international businesses, you don't diminish that pool of buyers and sellers, and you glom all that supply and demand into a single massive exchange. This is called the opening and closing cross, and major exchanges like NYSE and NASDAQ already do this at market open and close. This is basically what the market is like at any given moment. There's a huge book of thousands of orders at all sorts of prices, people willing to buy and sell, and the price right now being reported at Google Finance is what people have already agreed to change hands.
Once a day wouldn't stifle speculation. Why not make it once a month -- do businesses REALLY do massive shifts in capital every day? Why not once a week, that seems safer still...
In reality you're getting mad at people who are willing to trade with you right this moment and pay you 2 cents more than if they went away, so that they can sell it for 3 cents more to the person that wants to buy right now at market price. HFTs lose money just as fast as they make it. I don't think you realize what a small margin they are operating on (and how little these banks are actually getting relative to their bonds market operations, for example..)
Arbitrage is certainly important, and it should happen on a time scale that is faster than ordinary economic events, because markets need some time to adjust [1]. But it is fairly obvious that there are strongly diminishing returns for society as arbitrage becomes faster. Imagine a hypothetical alternative market which operates on a one minute heartbeat, for example: the market algorithm simply runs a secret auction once per minute at a pre-determined time, with bid prices as fine-grained as one millionth of a cent to avoid some pathologies. My hypothesis is that such a market would be as inconsistency- and arbitrage-free as what we have today, to an accuracy where the difference simply doesn't matter to ordinary investors - where by ordinary investors, I mean actors with an investment horizon that is measured at least in months. So you would have the same benefit to the society while using less resources (resources that are currently used to get ping times down etc.).
At the same time, look at your last argument: HFT traders are basically competing among themselves, but since their response times have to be so fast these days, they are mostly competing to exploit each other's weaknesses and the weaknesses of the trading algorithms of larger investment funds.
In the hypothetical market, competition between algorithmic traders would still happen. But since there is now more time for computation, the emphasis shifts away from hacking to get short response time and instead towards making more intelligent decisions about price. There might be a shift towards more emphasis on evaluating fundamentals, and that can only be a good thing for the efficient allocation of capital.
[1] Incidentally, I suspect that the reason that much of what neoclassicals say about the macroeconomy is wrong precisely because they incorrectly assume fast arbitrage in macroeconomic events.
Please, have none of us seen the Kevin Slavin TEDTALK on this? I had my whole analytical team sitting in my office to watch this one (I'm the mathematician in the group). As a Republican activist I argue that HFT distorts the free-market purpose of the stock markets in a way that violates basic assumptions about the market, and as such can then push to tax short term capital gains at a punishingly high level without "raising taxes" because supporting free-market principles trumps (sorry) supporting lower taxes.
"There is no god but allah" - well, they got it half right.
No, insider trading is occures when someone with inside information about the operations of the company trades on that information before the public is made aware of the same information. What is described above could be considered front running customer orders however the pre-order described was probably not one order but many orders that were recieved in broker systems and aggrigated by a single broker you puchased the orders from the other brokers. This goes on all the time with broker machines biding other broker machines for order flow. The aggrigated orders contain enough informaiton about the supply and demand of the stock to allow the aggrigators HFT system to buy and sell at a near guarantee of profit. It isn't illegal although given that trading is a zero sum game and a great deal of money is extracted from the natural buyers and sellers it would sure seem immoral. Brokers are alleged to be trusted intermediaries. Sucking blood out of your clients doesn't build trust, hence, trust in equity markets, and capital markets in general, is fading fast.
The thing is, HFT *does* affect long-term investing. The profits they make don't come out of nowhere; the money comes out of profits someone else would make. So they're essentially siphoning off money from long-term investors (like pension plans). Personally, I think we should tax individual stock trades, just to slow them down if nothing else... long-term investors wouldn't really care about a 0.1% tax on trades, but it would wreak havoc with the HFT guys.
That's not insider trading. Insider trading of Microsoft stock would require that the trade be based on some material non-public information about Microsoft, the company. The fact that somebody has put out an order for their stock, whether public or not, is not information about Microsoft but about the market.
Has no one read "Daemon" & "Freedom" by Daniel Suarez? Jeesh.
Actually, it is pretty crazy. Sure, it's reasonable for an individual to invest in mutual funds. Pay somebody to invest for you. It's basically free money, based on how much money you have to start with. But on a societal level it's totally crazy. Rational actions by individuals do not add up to rational group actions. Tragedy of the commons is inevitable when there's too much individual freedom.
Maybe corporations wouldn't be as evil if they were beholden to real people, rather than fund managers, who seem to be some species of slime. Maybe these fund managers *do* know a lot about the companies they invest in, but they have a fiduciary duty to not care about anything except money.
I think all the hoopla about HFT is way overblown. Rather than try to interfere, why not let it just run its course? It's the hot new industry now, but eventually, that won't be the case. Like most other industries, it's on a trajectory towards commoditization. IOW, increasing effort is required for decreasing profits.
I've worked for a small HFT firm for many years now; helped it grow from startup to where we're at now. Some random factoids that a lot of people don't understand:
What kind of people are really hurt by HFT? Certainly not me, as a small-time buy-and-hold investor. Heck, I send market orders. I intend to hold my securities for at least a decade. If I over-pay by a cent or two, I don't really care. And, as I suggested in my last two bullets above, who's to say that I didn't get a better price due to HFT? Maybe some market maker took a loss on the trade with me, but profited overall from exchange rebates? Maybe without automated trading, I would have had to pay a larger bid-ask spread? I don't think anyone can really know the answers to these questions. I'm certainly not losing any sleep over them.
Opposite me are the big institutional investors managing mutual funds, trusts, pensions, etc. These people typically have a goal of meeting some pre-defined position based on the design of their fund. The bigger goal is meeting the fund strategy, rather than micro-optimizing each individual trade. Do they really care about the HFT guys skimming a bit off of each trade? And, as in the case of the small buy-and-hold investor, how can anyone know that they actually are getting a worse price than they would without the HFT guys? How does anyone know that the big institutional investors also wouldn't be subjected to a costly bid-ask spread?
I'm certainly not trying to defend HFT. I keep m
"But raising your ask over their ask will just as surely not result in a trade (because if there is any trade it will be at the lower ask)."
In an idea market that would be true, but if the market were actually ideal no trading would ever take place.
In order for a stock to rise in price, somebody must pay more than the current market price. When I wrote "price" I did mean ask, but the whole purpose of HFT is to take advantage of minute fluctuations... where somebody is paying more than somebody else. If those fluctuations did not occur, there would be no market. If nobody ever paid more than the current market price, stocks could only remain flat or go down, never up.
"But the cause is not nearly so simplistic as you imagine."
YOU are the one misunderstanding here. I did not accuse HFT of causing bubbles. What I *DID* write, however, is that if the current trends and regulations continue, such a bubble in inevitable. NOT because of the way it normally affects the market, but due to software error.
As I said, it has already happened once on Amazon, in which books that normally sold in the 2-digit range had their prices suddenly raised over a few days to 7 digits. Obviously the books -- like any stock that happened to -- would not sell at that price. But loops can happen in the other direction, too. Which is only a very small example, and that was a direct loop: two vying systems going at each other. But indirect loops are possible too and no amount of software cleverness is likely to completely eliminate them. Remember that recent $440 million loss?
when it fails too fast, of course.
There are many. The most important reason to investors is that the cost of investing would increase and the value of companies would decrease. Delays in price discovery necessarily increase the bid/ask spread - which directly and negatively affects the price someone can buy or sell. Trading companies can afford to offer and bid at 1c spread because they can disperse risk very quickly. Without that speed the trading company cannot profit from 1c or 2c spreads. With 1 day between trades spreads would likely go to dollars. Liquidity would dry up, and investors would go oversees. With less investment in US stocks, US companies are penalized, and overall the US does worse.
Anything that interferes with efficiency will cause some participants money (actually, by definition). Such interference should only ever be done to improve fairness and openness.
This isn't true. HFT pulls money almost exclusively from brokers by being faster and more competitive. This is the only industry where people regularly complain about competition!
Investors actually get a better deal because of HFT (on the whole - I'm sure there are some bad apples).
Investing is always gambling. HFT is most often base on some kind of arbitrage, which is relatively risk-free, and therefore NOT gambling...
Completely wrong. The rules aren't specific to any particular participant. ANY "clearly erroneous" trade may be broken - and it's done by the exchange or SRO who is a neutral party. The rules are very clear and simple.
A transaction tax would not have the effect desired. It would become unprofitable for market makers to keep the spreads at 1c - therefore the spreads would widen. The market maker still makes their profit, but the investor gets a worse deal. The INVESTOR ends up "paying" the tax - not directly, but via market forces.
It WOULD lead to reduced liquidity, which will slow the economy overall.
Any such tax leads to more inefficiency. It should only ever be done to improve fairness and openness. Trying to punish some market participant with taxes and regulations is highly suspect, especially when they aren't doing anything dangerous, unfair, harmful, or illegal.
This is merely a witch-hunt.
1. Broken trades are done by an exchange only when the trades were "clearly erroneous". E.g. they occurred outside the NBBO.
2. HFT companies aren't the companies that were bailed out. I know of no HFT company that received any bailout money at all.
3. HFT company ONLY see public information, just like everyone else.
HFT is mainly about taking data (orders, and information derived from order fulfillments) and creating or modifying orders according to some set of rules that are maintained outside of the trading system. I'm not convinced that the people hurt by poor HFT rules deserve assistance when their rules result in something unexpected.
So, if faster is better, what if we just moved those rules into the trading system itself? Let the system evaluate everyone's rules in parallel (perhaps massively so), and execute the resulting orders simultaneously.
a social thing? i thought it was about making money. So, is the real problem people who aren't part of the club are losing too much money, or is the real problem people who aren't part of the club are making too much money ? It's weird business that's what it is. If google has the better algorithm for a search engine, should it be denied because the others can't compete. I don't think i wanna get into this
Free speech was meant to be free for all... how can anyone grow up in a nanny state ?
i don't know about shares, that's for people who got money. But currency trading seriously wouldnt work if you get one trade a day in. Not for the small fry anyway. You need response time way less than a second if you need to close down something fast. Depending on the lot you're trading that can make 100s of 1000s difference. I can't even imagine what that means to people trading in millions.
Free speech was meant to be free for all... how can anyone grow up in a nanny state ?
This isn't true. All the same information goes into informing a stock price as it ever did, only now it happens faster.
If this were incorrect, there would be an arbitrage opportunity. And guess which trading companies would likely benefit from the miss-pricing?
> If you're a long term investor, with a time horizon of many decades, this doesn't matter. Oh yes it does...this continuous and unproductive extraction of capital from the market drives the worst sort of short-term management practices and also saps resources from firms and investors that would otherwise be available for innovation and expansion. HFT is completely and utterly socially useless, to use Paul Volcker's phrase. It's no different, effectively, than a guy with a nail punching a hole in a pipeline to get petrol in a bucket. And all the other investors pay for the petrol, the bucket, and the nail. Oh, and the fire that starts eventually, as well. It's costing us big time.
> With that in mind, there needs to be a discussion on how best to disincentivize this kind of extremely short-term behavior, where it is via transaction fees or via trading on heartbeats. Disallow trading losses and fees incurred on any financial instrument held for less than 24 hours when accounting for taxes on net investment income. i.e. - don't allow a firm engaging in HFT to count losses and trading fees against profits when figuring its taxes.
Nope. The best at investing really do learn a lot about the companies they invest in. Look at Berkshire Hathaway.
This isn't true. HFT works in many markets where the spread differs by many orders of magnitude from a penny.
What do you think is so special about a penny?
The downside is that you'd have a much less liquid market for equities, and wider spreads between bid and ask. Transaction costs would be higher, because brokerage houses would have to survive on much lower commission volume, so per-trade commissions would go up.
Like it or not, speculators provide liquidity and can even be a stabilizing influence. Imagine a stock that is affected by a negative rumour. Now imagine a bunch of weak players shitting their pants trying to get out of that stock, but there are no speculators in the market betting against the rumour. So they throw market orders out there, but the only buyers are at prices way below where they "should" be if there was more liquidity.
Now you have transactions going on the record at the lower price, and the stampede will really begin.
In Reason We Trust
You're probably right, I doubt HFT as it's happening today really provides much if at all arbitrage that you couldn't get at a coarser level, as you suggest. But my point, I guess, is that - with the OP - I don't think that doing so would solve any other problems we have. HFT is a vicious cut-throat form of gambling for certain people who want to indulge in it. But I doubt it's actually causing any major negative effects for normal economic activity - companies actually doing things to make money, regular investors investing in stocks with a vaguely long-term horizon (or really, anything outside of a week). I don't see any 'real world' problem that would be solved by outlawing HFT, really. All it'd do is stop one set of HFT traders making themselves extremely rich at the expense of a bunch of other HFT traders, so far as I can see.
A fixed tax on all trades where the buy / sell occurs within the same financial year? That makes it profitable to buy for investment, not so to buy for turnover .
Of-course the actual solutions aren't even accepted on silly public forums, and they are definitely not going to be accepted by the politicians.
Perhaps it is the vain hope that in some way, we can educate the people about the American History X shower scene style ass-raping they are receiving by perpetuating a 1-party (yes, technically, there are 2 parties, but play along) system that exploits them mercilessly. And they like it?
I was traveling around reconnecting with relatives I hadn't seen in years (thankfully?) and I noticed that current American suburbia is morphine for the masses... The people, no matter what level of pain or despair, are Gerbils in their cages. Happy to keep the machine spinning while ignoring greater issues. The best political debates I heard centered around abortion, gun control, and how the Democrats were nothing but communists. I actually kind of enjoyed the last one because none of the 100 or so relatives I visited understood the irony; namely, that they are the victims of a press owned by the same rulers who dictate the injustice they strive to live under...
WTF?
CAPTCHA: exploited
....snip...
I'm fine with HFT. My only conditions are: ....snip....
I am not sure I am.
The problem with HFT is it creates two clear groups.
For now lets call them wetware and hardware.
The problem with two groups (yes there are more) is
that the statistics to protect the groups from goofiness
look a lot like a Bactrian camel for want of a better
simplification.
Regulations that act on the central average are clearly
incorrect when the two humps are obvious. A decision
on the central average will overspend on one one hump and
under spend on the other.
Companies have the same problem with multiple products
that differ in cost or one sort or another. It is obvious in
support where 2% of a multi-million computer system gets
a lot of value for both the customer and the company.
On a $25 computer 2% does not get past "Hello my name is Peggy".
Remember that HFT operates on a shared commons but those that share
the market are not equal. More and more individuals are no longer
in the market because they do not even get past "Hell" for their dime.
In some cases automated systems can make a market for individual
traders. However just like some of the "big oil" contract games
the game is rigged to provide accommodation for the insiders in
a very limited group.
In closing the pressure on the middle class is pushing the humps
further apart. At one time the middle class filled in the gap
and minimized the weight in the disparate humps.
Speaking of: "What does "DO NOT HUMP" mean on the side of railroad cars?"
Truth is stranger than fiction, but it is because Fiction is obliged to stick to possibilities; Truth isn't. Mark Twain.