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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?"
Wish I had mod points for the parent here.
The key point HFT people keep harping on is increased liquidity. The issue is that at some point, a point we reached long ago, that increased liquidity became meaningless to investors and the HFT tax became a burden. Even institutional investors pay this tax. Only other HFT traders care now.
They are skimming money off the top, adding ZERO value to the market, and pissing off just about everyone.
But they have the money, so they can prevent regulations from limiting this... (plus regulaiton are always bad, right?)
This is why I favor a 0.1-0.5% fee. If we really want, we could also assess the fee as an inverse function of how long you've held it: the longer you've held the stock, the lower the fee, and it gets exponentially smaller with time until it is insignificant.
But if you want to trade something you bought 5 seconds ago? Enjoy your 90% fee.
Check out my world simulator thingy.
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.).
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.