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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.
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
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
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
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 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
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.