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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.
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
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.
... 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
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
stock market should not be about what you said: speculation. it should be about long term investments, that way, speculators, adventurers and all sort of thieves will go way. once or twice per day is more than enough. the way stock markets are now, is simply a distortion of its purpose. p.s. shorting should be outright banned too.
War on prosperity?
Have you lost your mind?
Yes, we should expect them to turn it off. For the same reason that if I had a machine that stole money out of your savings every night I would have to turn it off.
How would it go underground?
If the NYSE says all trades must occur at the same time, or in a queue, or charges $1 per trade, what would they do about it?
There are lots of solutions here, the NYSE should select one.
The function of the stock market is not to make you able to buy and sell stocks based on what other people might pay for them. That is an unfortunate side effect.
Some people like you have long since abandoned stocks as a way to distribute risk and capital investment among more than one investor. Instead you view it as a game where its all about tricking some poor sod out of their money. Where the fuck do this contribute in any way to anything? Personally i would be all over a stock market that was regulated back to what it was first meant to be, somewhere i could invest in good ideas and ventures based on how much they would pay off in dividends, not inflated stock prices.
HTTP/1.1 400
Why should shorting be banned?
Why should I not be able to promise you a stock tomorrow at less than todays price?
Either I made the correct prediction or you get a great deal.
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.
The hardware could be free, the code installed on every machine shipped and HFT would still be very expensive in capital costs.
You have to be physically close to the exchange, the speed of light being a real bitch and all. Then you have to pay for the fiber link to the exchange and pay the exchange for the privilege.
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
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
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.
Nothing so extreme is necessary. You can kill the HFT nonsense with a few straightforward tweaks:
1. Put a random delay on every order, up to 60 seconds. This makes millisecond-level speculation worthless.
2. Assign a small fee (0.1%, 0.5%, something on that level) to every transaction.
3. Require sellers to make good on their offered prices. Don't offer a price you aren't willing to actually take.
Some combination of those would eliminate HFT as a useful vector of profit-taking.
Check out my world simulator thingy.
shorting should be banned for a couple of reasons. first of all because you don't own the stock that you are trading. secondly because it leads to manipulations ( people not just predicting that the stock will drop but having interest in that stock dropping and thus acting through various means towards that end ). Which brings us to the third reason: it's just a fraud. the only person who gains from shorting is the guy doing it not the actual stockholder, the stockholder loses money.
I think selling stuff you do not yet own is legal, otherwise how would drop shipping work?
Regular trading leads to manipulations ( people not just predicting that the stock will go up but having interest in that stock going up and thus acting through various means towards that end ).
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
pause. think. then post
intellectual property law is philosophically incoherent. it is your moral duty to ignore it or sabotage it
Incorrect. Every short trade has a corresponding long trade. If the guy borrowing the stock loses money, the guy lending it makes money.
Exactly. This is a game the small investor will never be able to play, because of how the exchange is set up. It's a fundamentally unfair advantage.
Check out my world simulator thingy.
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.
The implication is that the little investor loses out on his rightful chance to screw the other guy. The people who hate HFT are the same ones who bitch and moan when someone at a blackjack table "steals" their card by hitting when they shouldn't.
i could invest in good ideas and ventures based on how much they would pay off in dividends, not inflated stock prices.
You might invest there, but few other people would. See its like an onion and no matter how deep you think you've dug there's a deeper layer. I REALLY don't want to invest in dividend stocks because I want to control when to pay income taxes on my investment's growth. I do own some electric company stock and some PHB at the powerco decides when and how much tax I should pay on their growth. I hate that. Which is probably why I have less than 5% of my investments in dividend yielding stocks. I would much rather pay long term cap gains when I'm retired at a nice low income so a nice low tax rate, rather than every year now at the peak of my income. Furthermore the power of compounding means at retirement I'll have more money to be taxed less, because I'm not getting taxed on dividends every quarter. Non-dividend yielding stocks are kinda the poor man's IRA, sorta, in that you don't pay taxes on them until you want to, probably when you retire.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
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...
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.).
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.
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.
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
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
Really?
09F91102 no, 455FE104 nope, F190A1E8 uh-uh, 7A5F8A09 that's not it, C87294CE no. Ah! 452F6E403CDF10714E41DFAA257D313F.
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
No, no theft required. Let's keep this simple and have two actors.
Let's suppose that the company in question is about to release its quarterly results. Rumours are that it will be a poor quarter.
Actor A is going long on the stock, he thinks that over time (in the long run) the company will go up in value. He represents the long term investors in the stock market, the pension funds, the banks etc.
Actor B (for whatever reason) thinks the price will go down in the short term. They represent the analysts/trading houses/whoever.
Both are gambling. Actor A realises that the price of the stock goes up and down on a frequent basis, but he doesn't care, he believes that the company has solid foundations and even if they are poor results he is sticking with it. Actor B doesn't care he's convinced that it will be poor results when they are announced and wants to make money.
Actor B borrows Actor A's stock and sells it before the results are announced. After the results are announced he has to buy the stock back at whatever price it currently is.
If Actor A is right and in the long term the company is a good company then he has gained the fee Actor B paid him. Any short term fluctuations don't matter to him, he cares about the long term.
If Actor B is right he made money from taking a gamble on the short term. Long term doesn't matter to him he is paying close attention to day by day news.
I don't see the problem here, no theft, no fraud, just people with different motives and information profiting from each other; or more accuratly profiting from the less informed people.
And maybe actor B isn't taking a gamble maybe he just did better analysis of the current customer situation and therefore deserves to be rewarded for predicting the price crash. Maybe Actor A is an idiot for putting his money into Facebook and deserves to lose his money because "it's always grown in the past". Maybe Actor A is right to keep his money in Apple even when people predict "they must have a bad quarter one day". This is a good thing that people are looking at these things and being rewarded/punished for it.
"The weirdest thing about a mind, is that every answer that you find, is the basis of a brand new cliche" -
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!
Some firms post a million buy-sell orders a day, but only execute a few of them.
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
You are going to need a citation for that.
Shorting, or buying or any other market activity is based on you believing it is not a 50/50 case.
Gambling is what the stock market is, we crossed that bridge long ago when dividends stopped being the norm.
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
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
"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.
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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and had humans doing what the program do, it would be illegal.
The Kruger Dunning explains most post on
Goldman&Sachs would go belly up in a week. So yeah, no downsides.
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.
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.
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.
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)
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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...