Tweet From Hacked AP Account Causes High Freq. Traders To Drop DOW 150 Points

New submitter Mike Lape writes "Stocks plunged and recovered within minutes after the hacked AP Twitter account sent out a tweet that indicated that the White House had been the victim of an explosion and that President Obama had been injured. '...the Dow Jones Industrial Average took a quick 143-point plunge, before recovering most of its losses within minutes. The three-minute plunge triggered by the tweet briefly wiped out $136.5 billion of the S&P 500 index's value, according to Reuters data. Interestingly, Tuesday has been the best day of the week for the blue-chip this year with an average return of 0.46 percent. If the index closes in the black today, it will have been up for the 15th consecutive Tuesday. The last time the Dow rose for 15 straight Tuesdays was in 1927.' An analyst said, 'That goes to show you how algorithms read headlines and create these automatic orders – you don't even have time to react as a human being.'"

Comments

First for banning HFT

[Anonymous Coward]

It serves no purpose.

Re:First for banning HFT

[noh8rz10]

internet prank with stock market side effects, or intentional market disruption and subsequent gain? btw this is why I don't read tweets.

Re:First for banning HFT

[interkin3tic]

How about we emphasize that it hurts productive industries and threatens the stability of the economy, rather than just say it serves no purpose. We don't want to discourage it simply because it doesn't help anyone but a few people, we want to discourage it because it HARMS the rest of us.

Re:First for banning HFT

[msauve]

You're apparently out of the loop. HFT stabilizes the market by adding liquidity, or so we're told.

Re:First for banning HFT

[tnk1]

And it probably does do that... but the stabilization is probably offset entirely by the strategies that the HFT algorithms use. In short, many of them are playing a meta-game of "this line will do that because lines usually do these things", as opposed to: "this looks like a good investment because it has good revenue and solid assets".

Re:First for banning HFT

[AuMatar]

Also, they aren't pissing on your leg- they're adding to your leg's liquidity.

Re:First for banning HFT

[Anonymous Coward]

But in this case, the HFT lost money while everyone else made money (those who bought at the cheaper prices). This may be a reason not to use HFT, but it's no reason to ban it.

Re:First for banning HFT

[Anonymous Coward]

That goes to show you how algorithms read headlines and create these automatic orders

No they don't. That would be the most stupid trading strategy ever imagined, you would loose your shirt in less time than you can say "Goolge translate".

What happened is that actual people reacted to the news and the trading algorithms (not necessarily HFT, but trading bots) thought they hit a pattern and amplified the movement. Nobody lost anything except the bot herders that sold at -150 because they trusted their bots. I really can't see how that "hurts productive industries and threatens the stability of the economy" as you say.

Re:First for banning HFT

[Opportunist]

HFT is basically betting on race horses with incredibly fast horses. When this headline hits the news, that number will go up/down and hence we have to buy/sell.

Incidentally, it does indeed do what the HFT algos predict. Self fulfilling prophecy. When HFT algos predict that the value will go up and buy, the value will go up...

Re:First for banning HFT

[faustoc4]

Thanks for the inflation

Re:First for banning HFT

[SpaceMonkies]

Who is 'we'? Clearly the people who make the decisions about it do not feel the way that you do.

Re:First for banning HFT

[llZENll]

We need a new exchange that only executes trades once per month. If a company is on this exchange it is not allowed to be on any other exchanges. Problem solved. If you need your money out early there is a small fee. No more flash crashes, much less speculation, invest in a company due to dividends and growth and not emotionally fabricated stock appreciation.

Re:First for banning HFT

[Anonymous Coward]

hm yes lets ignore the lesson of the last 13 years - less regulations ahoy!

Re:First for banning HFT

[Anonymous Coward]

How about if we ban loopy right whiners from making simple minded poorly informed rants about how the Federal Reserve works? Of course the reactionary media would need to fill in another villain to scare weak minded people, but they never really seem to have trouble at it.

Re:First for banning HFT

[Anonymous Coward]

It's fake liquidity, very shallow and fast moving. More like foam, froth or steam, really.

Re:First for banning HFT

[TsuruchiBrian]

The problem isn't more regulations vs. less regulations. The problem is coherent system vs. incoherent system. You can have less regulation, but then you can't have bailouts. You can have bailouts but then you need more regulation. The problem of the recent financial collapse was that the system wasn't coherent. There was less regulation and bailouts, That's a recipe for disaster. The authoritarians blame the lack of regulations and the libertarians blame the bailouts. Neither is right or wrong. They just prefer moving to different coherent systems.

Re:First for banning HFT

[ackthpt]

internet prank with stock market side effects, or intentional market disruption and subsequent gain? btw this is why I don't read tweets.

It's very revealing in what sort of morons do and base their trading upon it.

Re:First for banning HFT

[SpaceMonkies]

Exactly who is 'we'? Clearly the people who make the decisions about it do not feel the way that you do.

Re:First for banning HFT

[ackthpt]

You're apparently out of the loop. HFT stabilizes the market by adding liquidity, or so we're told.

That's just a rumor. Just like the preposterous idea that anyone really understands any of it.

Wonderful bit about how the past Fed. Chairmen haven't had a clue about it and how in the 1970's the markets only moved a million shares in a week, but now do it in a matter of seconds. Quite a lot of it is like watching a flock of birds darting this way and that. It's a current of stock trades, maybe it obeys something like Ohm's Law.

Re:First for banning HFT

[ericloewe]

So that's why I didn't get their definition of liquidity, I was thinking in financial terms!

Re:First for banning HFT

[TsuruchiBrian]

A company that is doing well is not necessarily a good investment, especially if everyone already "knows" it's a good investment. Good investments are companies that are undervalued. They can even be terribly managed companies that are just not as terrible as people think. There are many strong companies out there who's share price is severely inflated and therefore very bad investments.

Everyone can see for themselves how different computer algorithms and different humans investment strategies compare but simply looking at how well they did statistically. If algorithm X statistically makes more money than Billy, then algorithm X is a better investor than Billy. Algorthm X by definition has a better investment methodology regardless of how irrational it may seem or how rational Billy may seem. This goes the other way as well.

Re:First for banning HFT

[ericloewe]

Also known as a positive feedback loop.

Re:First for banning HFT

[GameboyRMH]

True, could it be the IRL equivalent of the MtGox DDoS,buy,wait,sell,repeat trick?

Re:First for banning HFT

[alexander_686]

Headline algorithms exist and make a lot of money. They only have to be right 51% of the time to work.

Mind you, most of the algorithms work off expected vs. actual earnings, revenue, or some other such number rather than the headlines. Of course, those numbers are released first and then humans write the headlines, but still

Re:First for banning HFT

[alexander_686]

This is not what I have been told. I have been told that it makes the market more efficient by squeezing the bid/ask spread. This allows people to execute trades faster and cheaper than before. However, this comes at the price of increased volatility. (There is some proof of this – but trying to pull out the effect of HFT against all of the other factors is hard.)

Re:First for banning HFT

[NatasRevol]

Morons? More like millions of scripts that auto trade based on keywords.

Re:First for banning HFT

[luis_a_espinal]

The problem isn't more regulations vs. less regulations. The problem is coherent system vs. incoherent system. You can have less regulation, but then you can't have bailouts. You can have bailouts but then you need more regulation. The problem of the recent financial collapse was that the system wasn't coherent. There was less regulation and bailouts, That's a recipe for disaster. The authoritarians blame the lack of regulations and the libertarians blame the bailouts. Neither is right or wrong. They just prefer moving to different coherent systems.

This ^^^.

F* bingo!

Re:First for banning HFT

[Anonymous Coward]

What the market 'needs' is a trading tax. Studies by economists have shown that even a 1/4 of 1% tax on trades would have a massively stabilizing effect on the markets. In the case of high-speed trading it acts as a bit of a speed-brake. You won't engage in the speculative 30 second play that should net you 0.9% now, because the tax turns it into a -0.1% loss.

Variants of this tax include not imposing it on assets that are part of an IRA or other retirement vehicle, imposing it only on the SELLER of the security and then only if the security is not held for a specified time period and a sliding scale of tax based on the time the security is held: e.g. 1% for intraday trades, 1/2% for less than a week, 1/4% for less than a year, 0% for more than a year.

Re:First for banning HFT

[interkin3tic]

Since you posted that twice, you must really want to know. I meant we as in we people who want to see HFT ended. I did not claim to be king or even an elected official tasked with regulating the market, just a voter. I'm sorry if there was confusion that I was speaking on behalf of anyone controlling the economy.

Re:First for banning HFT

[NatasRevol]

My uncle-in-law retired early, and well off, by writing scripts that key off certain reports & keywords. Trades in before actual people can, then trades out after ~1/4% change.

Re:First for banning HFT

[kilfarsnar]

What happened is that actual people reacted to the news and the trading algorithms (not necessarily HFT, but trading bots) thought they hit a pattern and amplified the movement. Nobody lost anything except the bot herders that sold at -150 because they trusted their bots. I really can't see how that "hurts productive industries and threatens the stability of the economy" as you say.

I'll just leave this here. http://247wallst.com/2012/12/04/high-frequency-trading-a-grave-threat-to-the-markets-and-the-economy/

Re:First for banning HFT

[operagost]

I'm sure that will be really convenient for people in retirement... or people who hit on hard times... or people who have stock in companies that are suddenly shown to have acted immorally.

Re:First for banning HFT

[alexander_686]

Let’s see, when France enacted their Tobin Tax, prices went down, liquidity went down, and volatility increased. And I have seen studies that argue the opposite.

I don’t think a Tobin Tax is the answer. It is often put forward by people who are suspicious of the chaotic energy of the market and of wealthy people – suspecting it is just a game of no real value. I would say that you were treating the symptoms and not the disease – expect that I am not even sure what the symptom or disease they are trying to cure.

Why not tackle the issue from the other end? For example, index long term capital gains to inflation. This would encourage investors to hold their positions for longer.

Re:First for banning HFT

[jfengel]

Coherence is, I'm afraid, not really an option in a democracy. Every decision is a compromise, and it's not even the same people hammering out the compromise from year to year. The best way to get coherence is to put one person in charge, but the downsides of that are well known.

We can try to design our system to be robust to the failures of democracy, though these days even that seems beyond our reach. We've grown so adept at blaming each other that even the flawed process of hammering out a compromise has become secondary to trying to get a brief moment in which to impose our will on our political enemies while they are down.

Re:First for banning HFT

[TheP4st]

From the summary: "That goes to show you how algorithms read headlines and create these automatic orders – you don't even have time to react as a human being."

Re:First for banning HFT

[Anonymous Coward]

lets just call it santorum and be done with it.

Re:First for banning HFT

[CanHasDIY]

Coherence is, I'm afraid, not really an option in a democracy

Hence the reason this country is supposed to be a Constitutional Republic.

Pure democracies suck.

Re:First for banning HFT

[lgw]

Mutual funds effectively trade once a day. I hear they're quite popular. I prefer ETFs, where I can see the current price before I decide to buy or sell, but both options are available.

Re:First for banning HFT

[roman_mir]

Try and start one and see how fast you are shut down because you are not complying with literally about fifty thousand regulations. It's not about one particular thing, it's about the fact of just how much you have to comply with before you can run your exchange. Obviously it does not do anything to make exchanges 'more safe' for anybody, what it does it prevents you from competing in that market.

Re:First for banning HFT

[centipedes.in.my.vag]

Captain Pedantic here,

The "3/5ths Compromise" was a move to remove power from plantation owners, not to devalue the humanity of slaves. Referencing it as a racist act is somewhat ironic.

Excelsior!

Re:First for banning HFT

[Fluffeh]

I agree with this as well, but then that opens up another can of worms. You have these massive banks and generally "safe" investments for mom and pop share portfolios. They suddenly go belly up due to some badly placed trade. You have the option, let them fall flat on their face (and many nerds here would say that's the best thing to do) but the flipside is that if they do fall over completely, you aren't just punishing those bad traders, but you are punishing all the mom and pop investors. At that point, what is the lesser of two evils? Do you let the company fold as a "Well, you were the idiot..." and in turn pass that message on to all the investors - or do you try to tighten up regulations, save the company and tell them not to do it again?

If it was as simple as a bunch of hot-head-traders being kicked out on the street, no brainer in my books, but it really isn't as simple as that. That's the whole point of "too big to fail". It means that if *this* company failed, then the knock on effect not only to direct investors, but also to the greater marketplace and economy in general might well be too great and it is better to throw money (ableit that no-one seems to have, lets print some) and make everything okay for the next few months and hopefully things will pick up.

I personally think that the bailouts were a terrible lesson to the traders and the entire country (if not world) is paying for it now, but at the same time, I don't even want to imagine what would have occured had the bailouts not been given.

Re:First for banning HFT

[roman_mir]

, I don't even want to imagine what would have occured had the bailouts not been given.

- nothing, banks weren't even compromised.

Re:First for banning HFT

[bbelt16ag]

i go for more regulation. The past decade or so has been nothing but gambling and thievery. I can say with out a doubt i am disgusted at the way our society has allowed this to happen. I pity what your children are going to go through in the coming years. I will do my best to prepare them for the pain and suffering to follow.

Re:First for banning HFT

[dgatwood]

In such circumstances, I would argue that you should individually bail out the investors who got screwed by buying the stock from them at something close to its original value, dissolving the bank, and selling off its assets to the highest bidder, with a cap on the number of stocks that the government will buy back from any single investor.

Re:First for banning HFT

[Rich0]

I'm sure that will be really convenient for people in retirement... or people who hit on hard times...

You shouldn't store money in stocks unless you don't need it anytime soon. Also, you could take out a short-term loan using your stocks as collateral.

or people who have stock in companies that are suddenly shown to have acted immorally.

They can sell it just as they can right now - they just have to wait 1-30 days for the trade to execute. This actually helps the little guy, because they can issue the sell order that night when they get the news and get treated the same as the guy who has his HFT software following the AP twitter feed.

However, simply executing trades monthly would not be sufficient. You'd need to randomize the time that trades are executed and have them run without warning. So, at noon GMT+5 on the 15th of the month plus or minus a fudge factor with a standard deviation of n hours everything in the book executes. If you don't have your order in the book, you wait another month. If the time is known, then what will happen is the book will be empty until about 3 microseconds before the trades all execute, and then the book will have 35 billion entries in it. It would eliminate day-trading, but not the advantage of institutional investors.

Re:First for banning HFT

[cas2000]

that sounds just like my uncle who used the same kind of "reasoning" to explain how to pick a good horse or dog that had really good odds because it just had a bad few weeks...everyone else thought they were crap, but my uncle knew better.

like every other gambler on the planet, he was a fuckwit....and confirmation bias ensured he remembered his occasional wins and forgot his hundreds of losses.

the problem with the stock markets today is that while they are supposed to be about investment and providing needed capital for expansion and productive work, they're actually about gambling and stock price manipulation....someone hacked that AP account to send that tweet precisely so that they could exploit the effect on stock prices.

banning HFT would be a good start to undo-ing that. a tobin tax and/or an extra capital gains tax on short-term speculative trades would be a great second step.

Re:First for banning HFT

[__aaltlg1547]

It serves no purpose.

Its purpose is to make people money. It works for that (sometimes).

Re:First for banning HFT

[jebblue]

Those scripts should be architected software that pulls from a number of sources, coalesces the data using some logical averaging at least then makes a decision on whether to trade. That trades happen based on keywords is hard to imagine.

Re:First for banning HFT

[__aaltlg1547]

It's not the prospect of a bailout that makes regulation necessary. It's the harm that people do to others by acting irresponsibly. For example, you need to do business with banks. Do you want those banks' lending, investment and financial reporting practices to be unregulated or regulated? Would you be comfortable with a completely unregulated company holding your money, even for a little while?

Re:First for banning HFT

[Fluffeh]

Interesting read actually. Very interesting.

As an upside on a global scale though, I don't think that this time round the rest of the world will have as much of the rubbish bonds/stocks, so at least (hopefully) the next time the bubble bursts, it won't wipe out economies throughout Europe. Bad news for the US I think though.

Re:First for banning HFT

[Kiuas]

People here are having a good laugh at HFT's expense and overlooking the actual issue here: someone trusted a single tweet to be a good enough of a source for a news event like this.

Don't get me wrong, I'm not a huge lover of HFT either, it's just that in this case it didn't cause the prblem, lack of fact-checking of any sort did. Think about it for a moment, if you were working at any of these banks and saw a tweet saying that there has been an explosion at white House, would you:

A) Make a decision right away upon seeing the tweet
OR
B) Type "whitehouse explosion" into google or just open up BBC or CNN or any major news channel and confirm that this has actually happen before staring to move about vast sums of money based,

I would somehow be able to understand it if it was their webpage that was hacked and somebody posted a headline about the fake attack or something but it's not even that, it's a tweet. A single tweet from a single source.

This is a case of major user error. I am not the boss of these traders but if I were they'd be out of jobs right now. I understand that speed is a key factor in these things - and that is largely because of the way HFT operates so it certainly has its problems. However, checking something like this only takes a few seconds and should really be the first thing anybody does upon reading such news from a god damn microblog.

To conclude: Yes, HFT made the situation worse and caused to escalate so quickly but the decision that led to that chaos was still made by a human or humans.

Re:First for banning HFT

[InsectOverlord]

Nobody lost anything except the bot herders that sold at -150 because they trusted their bots.

Not really. A lot of manual trades probably hit a "stop-loss" and incurred losses. And only the bots that jumped on the crash bandwagon late or with too aggressive targets lost money.

Re:First for banning HFT

[roman_mir]

Would you be comfortable with a completely unregulated company holding your money, even for a little while?

- I deal with a number of completely unregulated companies, I trust their owners based on the track record with them much more than I trust ANY regulated bank or government.

Re:First for banning HFT

[SolitaryMan]

In other news: investment is risky.

Re:First for banning HFT

[moosehooey]

Madoff's track record was good... until it wasn't.

Re:First for banning HFT

[SolitaryMan]

Suppose you do that. Suppose that exhange becomes popular. How long before somebody opens another casino^W exchange that will be trading "futures" or other kinds of bullshit "derivatives" based on that exchange?

Re:First for banning HFT

[jonwil]

A better idea would be a 0.001% tax on all financial transactions (share trades, commodities etc). Small enough that anyone doing it to invest and hold wont be affected but large enough that those doing HFT will find its unprofitable thanks to the tax.

Actually I dont know the exact number that makes sense for this, maybe its not 0.001% (I am not an economist, a tax expert or an investment guy)

Re:First for banning HFT

[jonfr]

Those scripts should be architected software that pulls from a number of sources, coalesces the data using some logical averaging at least then makes a decision on whether to trade.

That trades happen based on keywords is hard to imagine.

They do not have time. Reason being. They are too greedy to even consider it.

Re:First for banning HFT

[alexander_686]

Why wonder? Under the Bush tax cuts (made permanent by Obama) tax rates on dividends were cut. See the QDI rules.

I am not sure why you think any of those would be true. I can’t think of any particular economy theory that would back any of those 3 positions. All I can think of is that the reduced tax rate would make investing more attractive and push up share prices.

Re:First for banning HFT

[The Master Control P]

See, that's what would take care of the gambling problem, couple that with dismantling the FDIC and all of a sudden you have people who actually would be worried about their banks and financial institutions and start evaluating risks and rewards based on real market signals.

1. Yeah, because Joe Average Worker really has time to monitor "real market signals" on the bank into which he deposits his paycheck once a week. We can't all be John Galt like you, so brilliant you can single-handedly be an expert in every kind of transaction you will ever engage in and have no reason to fear ever being defrauded.
2. It's funny because the FDIC was created when the exact opposite of what you appear to think will happen happened.

Re:First for banning HFT

[BrentNewland]

>suspecting it is just a game of no real value A game in the way that pyramid schemes are games. The root purpose for stocks is to be paid dividends. You pay the company some money for a portion of ownership, and when they pay out to the owners, you get your cut. However, it seems that many companies don't do dividends, and that people buy stocks in the hope that they can sell them to someone else at a better price - eventually, that price drops, and someone loses money. Just like a pyramid scheme, someone is left eventually holding the bag. The article summary says "the tweet briefly wiped out $136.5 billion of the S&P 500 index's value", except that stocks have no inherent dollar value. When I buy $10 worth of stock from Google, Google has $10 and I have an IOU which may or may not be redeemable at face value. When I sell it to someone else, now I have money and they have an IOU. You can't buy anything with stocks, you can only trade them, and no one is required to buy them. So yes, the Stock Market is a game with no real value, only perceived value. You alter people's perceptions, those stocks are worthless. If you have $10 million in the bank and $1 billion in stocks, you are worth $10 million, not $1.01 billion, because other people have the $1 billion you spent on those stocks. Eventually, the market will completely collapse, as it needs constant care and attention to stay afloat. Also, just came up with a great analogy: A share of stock is like a raffle ticket. You might get a prize for it (the "dividend"), you might be able to sell it to someone else, or it may just become completely worthless.

Re:First for banning HFT

[The Master Control P]

And yet, all the places in the world one who has the choice would actually want to live have tons of regulations, while the places whose names are synonymous with hell in the public zeitgeist have none or next to none.

It might have to do with how unrestrained human behavior creates problems when there are millions of them living in close quarters, and all those horrible, awful laws and taxes and regulations are our way of kinda making it work anyway.

Re:First for banning HFT

[BrentNewland]

Sorry, stupid Slashdot comments deleted the line breaks and I clicked to Confirm too fast. And now it doesn't seem to want to save any line breaks, may be from Opera. Too much effort to figure it out.

Re:First for banning HFT

[mjwx]

Coherence is, I'm afraid, not really an option in a democracy

Hence the reason this country is supposed to be a Constitutional Republic.

Pure democracies suck.

You should try a Constitutional Monarchy,

You have a leader that you can love because she has not real power and all she does is make a nice speech at Christmas.

Re:First for banning HFT

[khallow]

How about we emphasize that it hurts productive industries and threatens the stability of the economy

There's no evidence for this. As to the claim that HFT serves no purpose, the people apparently making lots of money via HFT would demonstrate otherwise.

Re:First for banning HFT

[delt0r]

What do you think was happening in the previous decades? Hint. Same *%&$ different decade.

Re:First for banning HFT

[sFurbo]

How does it hurt productive industries? This blip was short enough and small enough that no-one except high frequency traders should be affected.

On the other hand, it does serve some purposes: It decreases volatility (at least, it seems so from the data), and in reduces the bid-ask spread.

Re:First for banning HFT

[sFurbo]

No more flash crashes

Wouldn't this lead to more flash crashes, where everybody tries to sell at the same time if a company does badly, as everybody can react to the news simultaneously, and know that they don't get another chance for a month? And everybody is afraid that somebody knows more, so they are more eager to sell?

Re:First for banning HFT

[tehcyder]

all of a sudden you have people who actually would be worried about their banks and financial institutions and start evaluating risks and rewards based on real market signals

How can normal people evaluate the risks and rewards of their bank or insurance company or pension provider? Because so-called experts certainly can't.

Re:First for banning HFT

[tehcyder]

How about the Patriot Act (the most unpatriotic piece of legislation prior to Obama's NDAA), it turns banks and other financial institutions into FBI and IRS agents.

Good. If you are going to have laws and taxes, you should improve the ways of catching those who break or do not pay them.

I know your answer would be not to have the laws and taxes in the first place, but that is because you are an extreme libertarian with no concept of history, morality or real-life economics.

You want to revert to the Nineteenth Century world of a few ultra rich capitalists paying no tax and being effectively above the law, with the vast majority forced to live on starvation wages, and powerless to oppose their employers. You might say, and even believe, that what you will get is a country full of happy, successful individually free-trading businessmen, but you won't. You'll just have even more powerful corporations with no check on their power.

Re:First for banning HFT

[tehcyder]

Coherence is, I'm afraid, not really an option in a democracy

Hence the reason this country is supposed to be a Constitutional Republic.

Pure democracies suck.

You should try a Constitutional Monarchy, You have a leader that you can love because she has not real power and all she does is make a nice speech at Christmas.

Or you could live in the UK where any sane person hates all the monarcy and families have a tradition of masturbating to goat porn rather than watch her fucking speech after Xmas lunch.

Re:First for banning HFT

[tehcyder]

Coherence is, I'm afraid, not really an option in a democracy

Hence the reason this country is supposed to be a Constitutional Republic.

Pure democracies suck.

In a true democracy everyone would own everything equally and have an equal amount of power, so that in the end the actual greatest good of the greatest number of people would inevitably occur.

But that would be communism from the viewpoint of a rugged individualist in the US.

Re:First for banning HFT

[tehcyder]

Regulations is what allows for "gambling and thievery", without regulations such behaviour would immediately be punished by the market.

Yes, and the only reason there are murders is because there are laws making it illegal to murder people.

In a pure free market you wouldn't need to make murder illegal, because the victim (or rather victim's family) would be able to sue the murderer and ruin him, therefore the logical outcome would be no more murders.

Once you abolish government, laws, regulations and taxes, mankind will revert to the pure innocence of a free market Eden. We'll have flowery meadows and rainbow skies, and rivers made of chocolate, where the children dance and laugh and play with gumdrop smiles. There will be just One Invisible Hand to rule us all.

Re:First for banning HFT

[tehcyder]

Try and start one and see how fast you are shut down because you are not complying with literally about fifty thousand regulations. It's not about one particular thing, it's about the fact of just how much you have to comply with before you can run your exchange. Obviously it does not do anything to make exchanges 'more safe' for anybody, what it does it prevents you from competing in that market.

Similarly, there are evil government regulations that prevent you from setting yourself up as a doctor, engineer, architect or lawyer without any qualifications. What a terrible intrusion on the free market.

No doubt you're a qualified doctor, engineer and lawyer as well as Financial Colossus and so could do all of those jobs with one hand tied behind your back. Meanwhile, in the real world, I like to know that if you build me a house or take my appendix out you have some idea of how to do it, and that I don't just have to rely on my grieving family to sue you after I've died of septicemia and fallen roof joists.

Re:First for banning HFT

[tehcyder]

My uncle-in-law retired early, and well off, by writing scripts that key off certain reports & keywords. Trades in before actual people can, then trades out after ~1/4% change.

Yeah, and I've still got a few 50% shares in the Brooklyn Bridge for sale, plus an absolutely guaranteed way to beat the casino.

Please.

Re:First for banning HFT

[tehcyder]

I don’t think a Tobin Tax is the answer. It is often put forward by people who are suspicious of the chaotic energy of the market and of wealthy people

Chaotic energy sounds sexy and cool, it has nothing to do with financing fucking businesses which is what the stock market is supposed to be for.

As for being suspicious of wealthy people, well yes. We don't all have the moral vacuum in our hearts which says that anything that makes money is good. Lots of people presumably make money from organised crime, that doesn't make it a good thing.

Re:First for banning HFT

[tehcyder]

Reducing or eliminating tax on dividends presumably just means that rich business owners pay less tax.

Whoopy do.

Re:First for banning HFT

[__aaltlg1547]

USSR had a track record too.

Of-course Madoff worked in a completely regulated environment, your point is backwards. Madoff was the product of the moral hazard created by the government, where people just assumed that gov't was all over his business, checking what's going on there, when in fact his previous ties to the government allowed him to be completely unregulated in an environment where everybody assumed he was.

That's what moral hazard does, that's what FDIC does, that's what Cyprus just went through (and will keep going through), that's how USA banking system collapsed (and was bailed out).

If I lose money with any business that is unregulated, don't worry about it, it's my money. Worry about yourself.

Err, no. Even the regulators trusted him because they knew him and thought he as a good guy so they let him skirt the regulations. A tighter regulatory regime would have forced them to audit him and then he wouldn't have been able to do what he did. That and you should note that every financial deregulation move by the government has resulted in a flurry of new shady and ill-advised deals resulting in a wave of business collapses.

Re:First for banning HFT

[michelcolman]

Well, to be fair:

- First possibility: message is fake. HFT loses a bit of money by selling at prices just below current prices and then buying back at slightly higher prices when the tweet turns out to be fake.
- Second possibility: message is real, markets tumble, HFT makes a shitload of money.

The probability of a fake message has to be pretty high for this strategy to be unprofitable in the long run. And then I'm not even mentioning the very real possibility of HFT algorithms managing to turn the first possibility into a profit after all by realising their mistake and reversing their positions while the other traders are still following their lead in selling,

That does not mean I condone automatic trading based on tweets, just that it's not necessarily as stupid a strategy as it would appear. Unfortunately.

Re:First for banning HFT

[dryeo]

She can fire the government (they'll always resign first) if they don't pass a budget, and if no other party has the support in Parliament to pass a budget she can dissolve Parliament so the people can vote in a new one. The people do get pissed if they're forced to vote to often and usually punish the party that won't compromise.
The system has evolved so that the government has to have a budget unlike the American system where it looks as though they'll never pass a budget again.

Re:First for banning HFT

[jfengel]

I don't think representative democracy/republic is really any more effective at it. If anything, a direct democracy has the potential to be more stable: while a single change in one office (51st/60th Senator, 218th Rep, President) can radically alter the entire direction of the country, the actual populace doesn't undergo a massive shift on a single day in January.

Direct democracy also has a million downsides, not least of which is that even though the population is fairly stable, their opinions can undergo strong shifts over the course of days (cf. the reactions to 9/11 or the Newtown shooting).

Re:First for banning HFT

[TsuruchiBrian]

that sounds just like my uncle who used the same kind of "reasoning" to explain how to pick a good horse or dog that had really good odds because it just had a bad few weeks...everyone else thought they were crap, but my uncle knew better.

The main difference being that a bad company doesn't need to win (i.e. become the best) in order to be profitable. If 1 horse is clearly the best (it has a 90% chance of winning), It is still a bad investment if it's betting odds are 19:1

Making profit in the stock market is about knowing things that other people don't know. Banning HFT won't change that.

Google is a great company. Google is profitable. Owning google stock is a good thing. This is what causes it's stock price to be as high as it is. Buying google stock doesn't mean you have faith in google. Buying google stock means you have faith that the company will be more profitable than most other investors. The current stock price is based on Google's speculated profitability.

Re:First for banning HFT

[TsuruchiBrian]

The reason banks are irresponsible is because of bailouts.

You can make banks responsible with regulation, or you can make them responsible by allowing them feel the consequences of their own poor decisions.

Lets say you give someone $1 million to invest. You don't care if he wins or loses, but he owes you $1.05 million the next year.

This person has no incentive to make bad investment decisions.

Lets say you give someone $1 million to invest. He owes you $1.05 million the next year, but if somehow he loses all your money you will forgive the debt.

This person's optimal strategy is now to go to Vegas and bet all $1 million on black. He has a 53% chance of coming back empty handed (i.e. he comes out the same), and a 47% chance of making a $995K. That's an expected value of $467K for 1 day of work.

Yes you can bailout banks as long as you can come up with incredibly smart regulations that prevent them from doing all the myriad of risky and potentially profitable things whose risk for them is completely mitigated by bailouts.

Or you can just remove their safety net. Now instead of incentivizing them to do the most risky things allowed by your regulations, they are incentivized to make the best investments.

I am not saying that we should eliminate all bank regulations. I am saying that bailouts cause bad behavior, and that eliminating bailouts gives us the same result as a mountain of regulations as far as incentivizing good behavior.

Re:First for banning HFT

[TsuruchiBrian]

Allowing the banks to fail does not mean allowing all the depositors to lose their savings. Anyone with money deposited in an FDIC insured bank deserves to be have their money reimbursed as long as the USA and FDIC are solvent institutions.

Allowing banks to fail means liquidating assets to pay of as much debt as possible if the bank is in the red (e.g. paying back depositors before closing their accounts), and then the FDIC covers the remainder so depositors don;t lose anything. The shareholders in the company lose all their invested money from the shares in the bank going to $0, with a 0% prospect of ever having any profit every again.

Bailing out the banks was about bailing out the shareholders of the bank, under the pretense that losing market liquidity by the sudden absence of lenders would be devastating to the economy. This is dubious especially in retrospect because after being bailed out the banks immediate reaction was to stop all lending. In fact Goldman sax immediately started buying toxic assets for cheap and reselling them to the government for a profit.

But even if we assume letting the banks fail would grind the economy to a halt, it is a false dichotmoy to say that our only 2 options were bailing out bank shareholders and allowing them to fall flat on their face. The government could have nationalized the bak temporarily, firing all the top executives without pay, letting all the shareholders lose their shirts, but still keeping all middle management and non-management workers on staff, until the bank could be sold to the highest bidder, and that money could be used to pay back the government money used to prop it up.

People, especially the bankers, wanted to tie their own fate to that of small town America during the bad times. During the good times they were perfectly happy keeping all the profits to themselves. That we were duped into believing this bullshit that allowing wallstreet bankers to lose part of their massive wealth would cripple the economy, is one of the great tragedies of the 20th century. In fact most people did not buy into this, but their representatives decided to side with the bankers anyway, and most still managed to keep their jobs.

Re:First for banning HFT

[TsuruchiBrian]

Why bail out the investors at all? They invested poorly. They are supposed to lose that investment.

Re:First for banning HFT

[TsuruchiBrian]

I don't think anyone is talking about abolishing murder laws when talking about deregulation. Usually there is a distinction made between laws and regulations.

The free market is really good at finding efficiencies. Because murders are illegal, there are less murders because the cost of murdering is much higher (e.g. likelihood of jail time, and possibly the death penalty), and usually not worth the risk. The goal of government should be to create laws in such a way that the optimal path to profit in the free market is producing the best product for the lowest price. This price includes the cost in money, safety, environmental impacts, etc)

Good laws are important for guiding the free market in the direction towards a peaceful, fair, and productive society. Unfortunately these sorts of regulations are the minority. Most regulations are a result of lobbyists trying to give themselves an advantage over their competitors. This doesn't mean all regulations are bad. It just means that most regulations are bad. The ones against unjustly harming people are still good to have.

Re:First for banning HFT

[ArsenneLupin]

Actually, it's a good lesson for the HFT... turn-around is fair-play!

Re:First for banning HFT

[ArsenneLupin]

HFT is basically betting on race horses with incredibly fast horses.

Are there any HFTs that speculate with ground beef futures?

Wow!

[MightyMartian]

You know, twenty five years ago, everyone was convinced it would be computers built by the military-industrial complex that would become self-aware and take out the human race. Now I'm beginning to wonder if HFT algorithms will be the ones that do it.

Re:Wow!

[Hentes]

If they are this easy to fool then we have little to fear.

Re:Wow!

[MyLongNickName]

Here's the rub. For someone like me, I couldn't care less about HFT. I am in it for the long haul. I've invested for almost all of my adult life. I don't invest on hunches, instead I buy broadly and then hold for a long time. My investments do about as well as the broad market and I have almost no trading costs. Even if some doofus thinks he can beat the market (no, they can't), he'll eat up 1-2% of his money on fees.

So let folks be stupid and market time and talk about dead cat bounces and triple witching hours and other mumbo jumbo. In the long-run I will beat the vast majority and I will do so with very little effort on my part.

The reality is the only investors who can beat my strategy are active investors who are involved in the management of the assets they own (like Buffett) and those with insider information (real insidr info, not what your brother in law told you at the cocktail party). So, let the market tank for a couple hours, a couple days or even a couple years. I couldn't care less.

Re:Wow!

[gtall]

Everyone? Wow, are you from another planet? The only ones I know who thought that were a bunch of geeks who watched too much TV in their formative years.

Re:Wow!

[7-Vodka]

You couldn't care less...

Maybe you should know that the big banks who do HFT also co-locate inside the exchanges and front run orders making hundreds of billions per year.

Also, you might want to know that if the market crashes and restarts like today the big banks can get their losing trades reversed and you can't.

All the profit they're making has to come from somewhere. Are you so certain it doesn't come out of your pocket?

Re:Wow!

[MyLongNickName]

Can you please cite a source?

Re:Wow!

[Opportunist]

As long as they stay as dumb as the average broker and just act on pavlovian reflexes, we should be safe.

Re:Wow!

[alexander_686]

I will point out something to buy and hold investors

The Bid / Ask spread has dropped by 90% in the past 30 years. You used to pay .5% to 2% for each trade – not it basically nothing. Moving to decimalization helped, but it is the HFT that really collapsed the spread. This is even truer for ETFs then for normal stock.

The fees that mutual funds and ETFs (which a lot of buy and hold investors hold) have also collapsed the past 30 years. Specifically for index funds, they have fallen by 90%. There are a lot of reasons for this, but about a quarter to a third is lower trading costs, which can be traced backed to HFT.

So, you save about 1% to get into a investment, and about .25% each year if that investment is a mutual fund.

Re:Wow!

[Anonymous Coward]

As someone who also buys-and-holds, yes, I can be sure it doesn't come out of my pocket. It's coming out of the pockets of:

1) Day traders.
2) Other HFTs that aren't as good.

Re:Wow!

[Nadaka]

edit: that second "sellers" should have been buyers.

Re:Wow!

[gatkinso]

Whew! I am relieved! For a second there I was under the impression that the price little guys pay for stock doesn't reflect these shenanigans. Thanks for clearing that up!

Re:Wow!

[TsuruchiBrian]

The money might be coming out of the pockets of other investors. It also might be coming from efficiency that HFT enables, The economy is not a zero sum game. Efficient allocation of resources leads to less waste and more total wealth. I am not saying that their gains are not to the detriment of others, I am just saying that they aren't necessarily. Also, nobody is forced to invest in the NYSE. They only people getting screwed are people who signed up.

Anyone who thinks the stock market isn't gambling is not entitled to a life of financial stability.

Re:Wow!

[TsuruchiBrian]

The market is not supposed to be "fair" in the sense that we should all profit the same amount. The market is fair in that people play by the same rules. If you think HFT is easy money, then you can invest in a company that does it and be guaranteed immense profit.

HFT doesn't necessarily remove value from the market. This assumes that the market's value is static. Yes they are making money, but they are also crunching a bunch of numbers constantly and causing the prices of stocks to quickly converge to a common value. This creates resource allocation efficiency.

Re:Wow!

[luis_a_espinal]

You couldn't care less...

Maybe you should know that the big banks who do HFT also co-locate inside the exchanges and front run orders making hundreds of billions per year.

Also, you might want to know that if the market crashes and restarts like today the big banks can get their losing trades reversed and you can't.

All the profit they're making has to come from somewhere. Are you so certain it doesn't come out of your pocket?

Profits are not finite, or more precisely, bound in such a manner that forces someone's win to match someone's losses.

Re:Wow!

[kilfarsnar]

Here ya go. That wasn't hard.

http://www.globalresearch.ca/computerized-front-running-and-financial-fraud/18809

http://247wallst.com/2012/12/04/high-frequency-trading-a-grave-threat-to-the-markets-and-the-economy/

Re:Wow!

[PoolOfThought]

I read your comment about why one should care about HFT, and it all sounds sinsister and scary, and yet, as the buyer you still get the stock at exactly the price you said you were willing to pay. Sure you might have gotten it for less (maybe) without these other automated traders, but if you wanted it for less then you could have simply bid less and gotten it at that lower price. The HFT would have still satisfied your bid as long as there was a profit to take, right? And if it was a perfectly even trade then it wouldn't get involved. And if it was a bad offer (lower than asking price) then your bid will just sit there anyway.

Take the boogie man out of the picture and you got exactly what you wanted right? If anything you got it faster so your money is tied up in actual shares instead of bids for shares.

Am I missing something or are you just bothered that someone else got in on the action by hopping in the middle?

Re:Wow!

[Bacon Bits]

Profits are not finite, or more precisely, bound in such a manner that forces someone's win to match someone's losses.

Don't be silly. Profits are bounded by the value of good and services produced. That is to say, they're bounded by the economy. The value of goods and services produced is finite -- you can only produce so much in one day -- so is the gross revenue, and therefore so are the net profits. Even in the digital world where you could theoretically produce quadrillions of digital licenses of valuable software at the same price, the money supply limits you. You couldn't sell 5 quadrillion licenses for WinRAR simply because $150 quadrillion USD does not exist. The money supply isn't that big.

It's precisely this kind of magical thinking about stocks and commodities that makes the stock market so volatile and ridiculously destructive when the illusion disappears.

Re:Wow!

[Bacon Bits]

Crap forgot to add the important part. Sorry about that:

Because the money supply is limited, just as the quantity of goods and services are limited, so, too, must net profits be a zero-sum game. If someone doesn't give you their money, they're going to give it to someone else or keep it for themselves. You can't get that profit back. You have to get profits elsewhere, but the fact that you lost a sale to A doesn't mean you can make a sale to B. It just means you can't make a sale to A and B both.

Re:Wow!

[Fluffeh]

Oh great, so it's M.A.D. then is it? We fool them into imploding, but they take out the entire economy as they go down. Brilliant, now we can't live with them and can't live without them. It's like the Cylon treaty.

Re:Wow!

[Algae_94]

I follow similar investment strategies, and here's my take:

Maybe you should know that the big banks who do HFT also co-locate inside the exchanges and front run orders making hundreds of billions per year.

That's very nice that those banks are making money. Front running is illegal already. This practice may affect my purchase prices by a couple pennies if true. That is miniscule compared to the gains realized over holding a good investment long term.

Also, you might want to know that if the market crashes and restarts like today the big banks can get their losing trades reversed and you can't.

If I'm a long term investor, I generally have no trades on a given day, therefore, I have no trading loses to reverse. If I were going to trade an investment, I would have established what I believe the value to be. If the market went awry like today and the prices where not what I thought the values were, I WOULD NOT TRADE DURING A PANIC.

All the profit they're making has to come from somewhere. Are you so certain it doesn't come out of your pocket?

The profit of every company and individual has to come from somewhere. Why would I assume it's at my expense with no evidence that it is?

Re:Wow!

[Jane Q. Public]

"The money might be coming out of the pockets of other investors. It also might be coming from efficiency that HFT enables"

I don't know that I'd call it "efficiency". Ease, maybe. Not the same thing.

"Efficient allocation of resources leads to less waste and more total wealth."

Show me where HFT leads to efficient of allocation of resources. I do not agree at all.

Trading in goods leads to efficient allocation of resources. But HFT today happens FAR too fast to have much impact on physical goods or manufacturing. It's only "efficient allocation of resources" if you consider numbers in a computer to be resources.

And in exchange, as this event demonstrates, we have to contend with dangerous and unhealthy volatility.

The Stock Market was intended to "efficiently allocate resources" when stocks represented actual investment in actual goods and services. Today, as often as not they are just derivatives being shuffled around, which don't much affect "resources" other than cash in somebody's pocketbook.

It's hardly anything anymore but a big casino. And even worse, with HFT it isn't successful companies that gain or lose, it's whoever can place his bet first. People who think that makes for a healthy market are off their nut.

Re:Wow!

[Jane Q. Public]

s / place his be / place his bet

Re:Wow!

[alexander_686]

No, mutual funds have trading expenses - because we are talking about the fund's trading costs - not yours. What do you think happens when you buy some shares of a mutual fund – that the portfolio manager sits on the cash you just sent in? No, they take your money and invest it – i.e. buy stuff with it – i.e. trade with it. And those trades are not free – trust me on that. Even if you sit and hold you position in a index mutual fund, other people will be buying into and selling out of that fund, forcing the manager to buy and sell stock.

Now, you are right that the portfolios manger’s trading expense is buried in the operating expense which includes a lot things, so you have to try to pick things apart using proxy values such as turn over ratios, have industry knowledge. Etc. For example, the general feeling for index funds is that the 2 biggest expenses are trading costs and licensing fees of the index. (A index fund has to claim that it is following an index, and whoever created that index tends to charge an arm and a leg to use their name.)

Re:Wow!

[rodarson2k]

I'm sure glad that HFT exists to help me reach my common price in the middle within 9 microseconds instead of two seconds. I was really pissed off in the late 90s when my stock order had cleared only a few seconds before my browser page had updated.

It's much better now that the order's cleared a few dozen milliseconds before the packet confirming placement of my order has made it back to me.

To liquidity, AND BEYOND!

Re:Wow!

[Anonymous Coward]

The normal average investors cannot beat your strategy.

A shitload of HFTs and other people can and do, and are stomping your strategy to death and making it less profitable.

Re:Wow!

[lgw]

If you're trading at "market price", you'll get a noticeably better price now than in the 90s, as the bid/ask gaps are much smaller with competing market makers. If you're placing a stop/limit order, the broker's fee for those has come way down - often the same as a market order. It costs me less to trade now, I can worry less about getting screwed on a market order, and since I'm not trying to day-trade there's no downside.

Re:Wow!

[MyLongNickName]

I don't see where the articles address the "reversing of losses" that the GGP cited. HFT may be flawed, but I don't see the items I questioned being addressed.

Re:Wow!

[feynmanfan1]

Don't HFT strategies constantly submit and cancel bids very rapidly in order to gain market information and so naturally decrease bid/ask spread? Where this might hit the buy and holders is by distorting the market, for instance the last 6 years of s&p market volatility has been on the high side. Coincidentally, volatility increases the profitability of most HFT strategies. I've also heard a HFT guy argue for the value of price discovery produced by HFT, to that I ask do the value of things in the real world really change that much on such short time scales? Couldn't those engineers and quants have there time allocated much more productively for the benefit of others, or are they really that worthless?

Re:Wow!

[Anonymous Coward]

Actually, front running is illegal, and if you as a retail customer call your broker and have a valid reason (and sometimes if you dont) your trade will be broken. Would be much harder for an institution to do so.

Re:Wow!

[VortexCortex]

You know, twenty five years ago, everyone was convinced it would be computers built by the military-industrial complex that would become self-aware and take out the human race. Now I'm beginning to wonder if HFT algorithms will be the ones that do it.

Well, I study machine intelligence systems, and when I observe what's possible with a few servers in my garage, and then observe the fact that we don't have any announcements of nearly self aware systems already out of the military-industrial complex already, it kind of scares the living shit out of me... I mean, I don't care if they've got them already and are keeping such AI tech quiet, but if cryptography is anything to go by and they are just keeping a lid on things then cyberneticists like me could find ourselves under very extreme restrictions in the near future -- Or worse...

Re:Wow!

[VortexCortex]

Everyone? Wow, are you from another planet? The only ones I know who thought that were a bunch of geeks who watched too much TV in their formative years.

Well, not Everyone, IMO... But certainly anyone who's hooked up an n.net program and trained it to do first simple, then increasingly complex tasks faster and easier than any almost any organic creature can be trained. I guess you don't know many of this type of folks, that also weren't geeks who watched too much TV in their formative years... It's odd to find any successful scientist that doesn't fit this description; In fact they frequently cite science fiction as a key inspiration.

Of course, I'm just talking about Earth here. Maybe I am from another planet than you are... Perhaps your race has no TV? I doubt the Venn Diagram of aliens who manage interstellar travel and also end up inventing TV looks like anything but a perfect circle.

Re:Wow!

[delt0r]

I WOULD NOT TRADE DURING A PANIC.

That's what everyone says, until they panic.

Re:Wow!

[kilfarsnar]

Sorry, is my argument from authority not authoritative enough?

Re:Wow!

[frinkster]

You couldn't care less...

Maybe you should know that the big banks who do HFT also co-locate inside the exchanges and front run orders making hundreds of billions per year.

Also, you might want to know that if the market crashes and restarts like today the big banks can get their losing trades reversed and you can't.

All the profit they're making has to come from somewhere. Are you so certain it doesn't come out of your pocket?

HFT exists to take advantage of arbitrage situations. They are reactive to changes in the market and colocating inside exchanges helps them to react quicker. It is certainly a profitable venture, as you can see.

Big Banks do not get any sort of priority over anyone else when having trades reversed. For starters, you are certainly not trading on the exchange for yourself, are you? You have a brokerage account, right? In that case, broker XYZ made the trade in their name. Your ownership of that stock exists as a notation on their books. That's it. Fidelity trades with Ameritrade. Bob does not trade with Joe. If some crazy event happens and trades are going to be reversed, Fidelity will ask for their affected trades to be reversed. All of them. Including the ones they made for you. But now, if you were trading for yourself, you can also ask for the trades to be reversed. I'm not going to paste a link here, but you can find it with less than 3 minutes of googling. Each exchange has a form on their website. Fill it in and email it to them. They can't refuse you just because you're a nobody. Really, they can't.

Now, as far as who's pocket HFT profits come from - that's a good question. First of all, there is no way to take any money from your pocket unless you are a party to the transaction. I had lots of money "in the market" as part of my retirement planning, but I didn't have any buy or sell orders. So I was completely unaffected by this flash crash. Right? My retirement was in jeopardy for 4 minutes. I didn't notice. I was working. Then the market recovered and my retirement plans were back on! Yay! Alright, so before HFT, buy/sell spreads were large. Now they are small. That's actually a very large benefit to me when I buy or sell stock. So no, I am not so sure that HFT is pulling money out of my pocket. Perhaps they are pulling money out of the pocket of the people that benefited when the buy/sell spread was large. Brokerages? I am not sure..

Re:Wow!

[TsuruchiBrian]

Lets say Alice is willing to sell a share for $10. Bob is willing to buy a share for $20. A HFT sees this discrepancy and immediately buys the share from Alice for $10, sells it to Bob for $20 and makes $10 profit just by being quick. This is the basic idea of what it happening, but because you have many companies competing to do HFT, the differences in buy/sell prices end up being much smaller.

What actually happens is this. The price is of a share is $20. Bob puts out a bid to buy a share at $15. No one is biting, but the price has been dropping. Once the price gets to $14.99, an HFT catches the discrepancy and buys the $14.99 share from Alice and sells it to Bob for $15.

An HFT could have made more money by waiting until the price dropped to like $10 and selling to Bob for $15, making $5 profit, except that another HFT would have jumped on the opportunity way before the price dropped to $10.

Because of HFTs you see a bunch of bids for $14.99 which is your clue that the price is $15. Any lower bids can be ignored because of the $14.99 bids provided by HFTs. Any higher bids are quickly accepted by the HFTs, but these bid's don't really happen because everyone knows the prices.

The efficiency created is that the price of shares is very quickly equalized across different trades and different markets. Because of all the actions of all the trading (a large part being HFT), we know the price is $15. In fact Alice can offer to sell for $14.99 and an HFT will buy the share before Bob even places his bid for $15.01, because the HFT has calculated that someone will offer at least $15.

Alice doesn't need to wait for Bob's offer in order to sell. This market liquidity makes trades happen more quickly and smoothly

It is not the trades between the HFT that has positive effects on the economy. It is the trade between the eventual buyer and seller that might not have happened (or happened so quickly) that was facilitated by HFT that helps the economy.

Re:Wow!

[Jane Q. Public]

"A HFT sees this discrepancy and immediately buys the share from Alice for $10, sells it to Bob for $20 and makes $10 profit just by being quick."

I know how it works.

"... but because you have many companies competing to do HFT, the differences in buy/sell prices end up being much smaller."

It's more a function of the frequency than the volume. But yes.

"Once the price gets to $14.99, an HFT catches the discrepancy and buys the $14.99 share from Alice and sells it to Bob for $15."

As far as I am concerned, you're just repeating yourself here.

"An HFT could have made more money by waiting until the price dropped to like $10 and selling to Bob for $15, making $5 profit, except that another HFT would have jumped on the opportunity way before the price dropped to $10."

I *KNOW* how it works.

"The efficiency created is that the price of shares is very quickly equalized across different trades and different markets. Because of all the actions of all the trading (a large part being HFT), we know the price is $15. In fact Alice can offer to sell for $14.99 and an HFT will buy the share before Bob even places his bid for $15.01, because the HFT has calculated that someone will offer at least $15."

But that's efficiency of "The Market". That's not "efficient allocation of resources". Not the same thing.

"It is not the trades between the HFT that has positive effects on the economy. It is the trade between the eventual buyer and seller that might not have happened (or happened so quickly) that was facilitated by HFT that helps the economy."

And now we're back to square one. I understand what you are saying: that HFT helps the market find it's equilibrium value faster. And that may be true, in theory.

However, the reality of HFT has been imperfect algorithms and market mistakes. Extreme volatility. HFT developers say these are bugs that are largely worked out... but it continues to happen. It happened just the other day, which was the whole reason for this discussion on Slashdot. This volatility means that it does NOT find market equilibrium reliably, or even more quickly. On the contrary: it is prone to positive feedback, which is a potentially disastrous thing in a stock market.

Second, regarding efficient allocation of resources: as a consequence of my first point (equilibrium prices not found reliably), AND when you add in the fact that HFT happens far too fast to affect allocation of physical resources (except for establishing price, which we have already seen is unreliable), then I say that it does not lead to efficient allocation of resources. In theory it could, but we are very far from making that ideal theory happen.

And I want to emphasize that allocation of resources in any production-based economy (which means just about any economy) has to take place physically, or the actual economy is not affected. Wheat needs to go from farm to mills to factories. Software has to be delivered. Etc.

In my opinion, it is this bit about getting "the market" confused with the actual sources of economic wealth that is one of the primary diseases of our country today.

Re:Wow!

[Jane Q. Public]

s / equilibrium value / equilibrium price

Re:Wow!

[TsuruchiBrian]

But that's efficiency of "The Market". That's not "efficient allocation of resources". Not the same thing.

The efficiency of the market leads to efficiency of allocation of resources. This is pretty standard Adam Smith kind of stuff. I don;t know why this would even be a point of contention. It seems obvious to me that markets are facilitating the allocation of resources by deciding winners and losers.

HFT adds market liquidity. Market liquidity is good.

Does HFT causes positive feedback loops? I would say in general it doesn't, but there can be some short term positive feedback loops that eventually get corrected. I mean who lost all the money from the recent crash? If you are right that HFTs caused it, then it was all the HFTs that sold low just after the crash anticipating it would go even lower. Regular investors didn't have enough time to lose money.

I don't think the evidence is conclusive. It seems that there are a lot of cases of HFTs preventing market swings.

I still don't see any real harm that HFTs have done. The increase liquidity and *may* be the cause of some very short term crashes that have no significant effect on long term investment.

HFTs don't need perfect algorithms. There just needs to be a lot of different algorithms out there, to prevent big crashes and bubbles.

Was this really HFT

[PhamNguyen]

Where is the evidence that this drop was caused by HFT algorithms? Unless there is evidence to the contrary, I don't believe that computers are yet capable of parsing that tweet and recognizing that its content is extraordinary (as opposed to the usual tweets that come from that account and others). A few minutes is easily enough time for humans to react.

Re:Was this really HFT

[noh8rz10]

nobody said it was caused by the algorithms themselves. it was caused by the HFT traders who are always on a hair trigger to buy/sell.

Re:Was this really HFT

[Dins]

I don't believe that computers are yet capable of parsing that tweet and recognizing that its content is extraordinary (as opposed to the usual tweets that come from that account and others).

I don't know, I could see it. Set up a rule that any tweet containing the words "explosion" and "white house" in close proximity raise a flag. Bonus points for "Obama" and "Injured" close to each other.

Re:Was this really HFT

[Anonymous Coward]

http://www.zerohedge.com/news/2013-04-23/twitter-hack-compete-evaporation-all-market-liquidity-one-chart

Re:Was this really HFT

[PhamNguyen]

I'm agree this tweet could have been flagged automatically. However, I question that a trading algorithm that automatically trades on such tweets could recognize this as a "once in a decade" type event.

Re:Was this really HFT

[maxwell demon]

While I strongly doubt that a computer program can understand the message, there might be several triggers for "intelligent" parsers in here. For example:

"White House" -> increase the importance level of the message, set applicability to "Global"
"Explosion" -> set the value to "bad"
"Obama" -> increase the importance level of the message.

Re:Was this really HFT

[Dins]

I think the words "explosion" "white house" "obama" and "injured" together in a tweet from a major news organization would qualify as extraordinary.

Don't get me wrong - I know what you're saying, and anyone who would set up a system to automatically trade based on an algorithm like that is a fucking idiot.

Re:Was this really HFT

[Opportunist]

What the hell does bombing have to do with economy? Care to explain that?

You wanna tell me people stop buying stuff if something somewhere goes boom?

Re:Was this really HFT

[ericloewe]

I can see it being sent to someone's screen in flashing red characters who then only has to press a button that says "ignore" or "Sell, sell, sell!"

Re:Was this really HFT

[luis_a_espinal]

The summary said it was the algorithms.

Then whoever is programming these HFT algorithms should be shot. Having them susceptible to tweets is just ridiculous speculation.

Re:Was this really HFT

[maxwell demon]

The faster your program has to react, the simpler it must be. I don't think Watson would have the slightest chance in HFT. I don't think the HFT traders have secret computer chips that are orders of magnitude faster than the usual ones. A machine instruction takes a certain time, and there's no way around it. Note that this is also a theme in human behaviour: In situations where you have to react quickly, you don't think. You just act on stored procedures (either genetically fixed, or learned). Note that it is even a different part of your brain which executes those learned procedures (cerebellum) than the part which is there for thinking (cerebrum).

Re:Was this really HFT

[Rob_Bryerton]

>>You wanna tell me people stop buying stuff if something somewhere goes boom?

Yes. It's called Boston. (not meant as a joke)

Re:Was this really HFT

[PoolOfThought]

Well, they stop buying some stuff and stop selling some stuff and start buying some stuff and start selling some stuff.

I dunno. Lots of people quit buying airplane tickets right after 9/11. If I recall spending cut down to a point that the government was urging people to go shopping and spend their money to keep the economy from getting stalled. Whether you agree with the advice or not doesn't really matter for this discussion. You asked if people quit buy because something goes boom and the answer is yes... some things. Other things get a LOT of buys when something goes boom. Preppers (right word?) might by firearms, or gas, or bread. Or duct tape or plastic sheeting. People who think nothing bad will ever happen might see this as an inconvenient rise in cost and will STOP buying duct tape for normal usage. Heck, they might even wait until no more is out there and then sell the little they have for a big profit. Yes, big booms affect the economy when people react to it.

Now, in the end it turns that this is often a wasted bit of action. But it is a legitimate reaction and it can be "gamed" for profit. By automations and by humans.

Re:Was this really HFT

[michelcolman]

anyone who would set up a system to automatically trade based on an algorithm like that is a fucking idiot.

You can call them a lot of names, but "idiot" is not necessarily true. The algorithms would have made a shitload of money if the tweet had been true, while they probably only lost a relatively small amount now. The odds of a fake message would have to be pretty high for this strategy not to work in the long run. In fact, they probably lost a lot less than the amount they may have made with "bomb Boston marathon". And I wouldn't even be surprised if they actually managed to turn the fake tweet situation into a profit after all by reversing their positions in time while others were still selling like monkeys after seeing the wiggly line go down really fast.

Immoral, dishonest, call them what you will, but idiots? Unfortunately, no.

Get rich quick scheme?

[almitydave]

I almost wonder if it was deliberately done to make a quick buck off a short sell. Sell high, make everyone panic, buy low.

Re:Get rich quick scheme?

[Animats]

I almost wonder if it was deliberately done to make a quick buck off a short sell.

I would assume so. The question is whether the people behind it had enough money available to make a big profit. The drop was only about 2%, so if you had $10 million to invest, you'd only make $200K if you timed it perfectly. Realistically, $50K to $100K. Not worth it.

Re:Get rich quick scheme?

[Rob_Bryerton]

Let's share conspiracy theories!

This event, the recent AP Twitter hack and the inevitable upcoming hacks lead me to believe someone (or some organization) has an axe to grind, and is quite effectively showing Twitter to be a completely unreliable source of information. Which it is, of course.

Several more of these, and "news" organizations will cease to use Twitter as a source (a good thing IMO), followed by the Twits or Twats or whatever you call Twitter users.

What do you think?

Re:WTF

[Anonymous Coward]

Desperately trying to turn every argument into a pro-pot one. Stay classy /.

Re:An effective "cause".

[Moheeheeko]

For that to work, people would actually have to give a fuck about /.

Massive potential for fraud and abuse

[benjfowler]

Everything that we're taught is illegal and unethical, the del boys in the City of London and Wall Street will do anyway.

Wouldn't surprise me in the slightest, if the same sort of self-entitled white collar criminals who brought us Liborgate, arranged for the AP Twitter feed to be hacked, and then primed their HFT bots to start shorting like mad?

Gosh!

[fuzzyfuzzyfungus]

I sure am glad that, unlike crazy neckbeard stuff like bitcoins, Serious Professional economic instruments don't suffer hilariously baseless volatility because some goofy website got hacked...

That would, like, reduce my confidence in the rationality of the market.

Re:Gosh!

[GrumpySteen]

I think you're confusing the stock market with arguments about the stability of the value of the US dollar vs stability of the value of a Bitcoin. Stock prices have always been volatile and subject to the panicked reaction of idiots whenever there's bad news.

Forget HFT

[alphatel]

Focus on the fact that all it takes is a rogue tweet to send the world, or financial markets, into a swarming panic frenzy. Expect more from people with less savvy and higher criminal intent.

Our idiot overlords

[PopeRatzo]

What kind of trader sells on an uncorroborated news story about the President being shot? It takes all of thirty seconds to see if anyone else is reporting the story.

I understand that they're trying to front-run the many big investors that are getting information in advance, and the high-frequency trading algorithms, but the willingness to hit the dump button on a sole report is just dumb.

The problem is the damage they do to everyone else. Otherwise, I'd say they deserve to lose.

Re:Our idiot overlords

[djmurdoch]

How did that do any damage to anyone other than idiots? If you had been smart, you'd have a buy order in place ready to buy if the market dipped enough. Then you would have made 1% today without even paying attention.

Seems to me like this was an entirely deserved shot in the foot to anyone who suffered from it.

Re:Our idiot overlords

[Opportunist]

30 seconds? You have a faint idea how long 30 seconds are in HFT?

If you want to get a feel of just how endlessly long those 30 seconds are, start developing firmware for microcontrollers. Then look at a second, and ponder just how much stuff you can do in that time. Now you know what 30 seconds is to them (since even with all the coke they're not even close to being clocked at 100+ MHz).

Re:Our idiot overlords

[PopeRatzo]

30 seconds? You have a faint idea how long 30 seconds are in HFT?

In HFT, nobody is pressing a button. That's why they call it HFT.

The people who sold on this news report were human beings, making decisions based on a single uncorroborated news report of massive import. The sellers were not HFT-bots.

Re:Our idiot overlords

[PopeRatzo]

How did that do any damage to anyone other than idiots?

Because a huge number of investors are people with retirement accounts, index funds, etc. They're not sitting at a computer watching the market because they're too busy working for a living. They have 401ks with market exposure because money gets 0% in the bank.

I don't give a shit about day traders. Like you say, they'd have option spreads on to protect from a sudden drop, and if not, screw them for being dopes. But there are a lot more people who are exposed to market moves who are not actively managing their portfolios because they're not trying to get rich, but only trying to outperform the damage done by our idiot overlords (Ben Bernake, the Fed, etc). They're just working people who thanks to Reagan and Clinton have 401k accounts instead of proper pensions.

Re:Our idiot overlords

[djmurdoch]

Because a huge number of investors are people with retirement accounts, index funds, etc. They're not sitting at a computer watching the market because they're too busy working for a living. They have 401ks with market exposure because money gets 0% in the bank.

If they didn't respond to the drop, they weren't affected. The market dropped and rose again within a few minutes.

Only the people who sold in response to the tweet or the drop caused by it, lost money. Doing nothing didn't hurt anybody.

(I guess some people might have stop loss orders that would have been triggered, but I'd say today illustrates why those are stupid.)

Re:Our idiot overlords

[PopeRatzo]

If they didn't respond to the drop, they weren't affected. The market dropped and rose again within a few minutes.

You probably know that mutual fund movements happen at the end of trading.

Someone who saw the precipitous drop and hit the panic button on their mutual fund (say, a retiree or soon-to-be retiree) would have lost, but good.

A lot is made of the notion that mom and pop should be in the market. It's been a hallmark of the past decades that the market is where retirees should put their money, and current Fed policy almost forces it. Fact is, small investors are shark food in today's environment. The days of being able to see who's doing the buying and selling are over.

I wonder if we'll ever find out what kind of trades were made by whomever manipulated the market today. The person who hacked the account and tweeted out that story could easily have netted 7-8 figures, unless it was not an individual, but a larger entity, in which case it could have easily been ten figures- on the dip and again on the rip.

It doesn't help that while the Boston Marathon bombings were dominating the news, congress saw fit to gut that bill they passed around the election that outlawed congressional insider trading. Suddenly, on "security grounds" lawmakers and their staff can again trade on the knowledge of bills that are about to be passed (or not).

I'm old enough to have heard Milton Friedman speak in person, on the campus where I used to teach (not business or economics, don't worry). I remember him saying that insider trading should be completely allowed, but only because back then you could actually see who was on both ends of a trade. Today, it is no longer possible to know who's trading what. All transparency is out of the market. That one fact does more damage to the so-called "free market" than any "socialist" policies coming from the administration.

Re:Our idiot overlords

[djmurdoch]

Nice selective quoting. Your line

Someone who saw the precipitous drop and hit the panic button on their mutual fund (say, a retiree or soon-to-be retiree) would have lost, but good.

pretty much mimics my unquoted line

Only the people who sold in response to the tweet or the drop caused by it, lost money. Doing nothing didn't hurt anybody.

Sure, responding to a drop like that by selling is a really bad idea. That only affected people who are reacting on a hair-trigger. Anyone who took 15 minutes to think about what to do wouldn't have lost anything, because by the time they tried to sell, the price would have been back up. (At that point they might have sold anyways, and lost the commission, but more likely they would have seen that a sale was unnecessary.)

Like you, I have no sympathy for the gamblers and the high-frequency traders who might have been hurt by this, but it would not have hurt anyone who was sensibly invested.

blame game

[ruggerboy]

If people lost money from that trading, then GOOD. Now, let me just check up on my 401K....!!!! FML....

Good historical reference

[Anonymous Coward]

I think the bigger issue is when you start getting stats like "The last time the Dow rose for 15 straight Tuesdays was in 1927." Cause things that were happening financially in 1927 were based on sound economics, and certainly did not portend the coming storm. The whole damn thing is a house of cards.

Re:Good historical reference

[Opportunist]

So I wasn't the only one pondering how it's probably not such a good sign when the current situation is similar to the one just at the evening of the great depression?

Brilliant!

[mareksokal]

If one knew that such a hoax would cause DOW to drop that much it would be pretty easy to make a quick buck. I'm no stock market genius but buying low and selling high is always a win, am I right?

1927 + 2 = 1929

[maxwell demon]

"The last time the Dow rose for 15 straight Tuesdays was in 1927."

And two years later it crashed.

What they don't mention...

[ggraham412]

They're big on blaming high frequency traders when the market drops in 3 minutes on bogus news.

They're not so big on crediting high frequency traders when the market recovers in 3 minutes when the news is recognized to be bogus.

I guess it was the army of Wilford Brimleys in bow ties and green eyeshades that did that.

Re:What they don't mention...

[RoTNCoRE]

If the money didn't change hands after all was said and done, fine, but there is a winner and a loser on each trade. Given how much the market affects pensions, municipal finances and the economy on the whole, just because the total value recovered, doesn't mean those caught selling on the way down weren't devastated.

Re:What they don't mention...

[Opportunist]

You sound like a programmer who wants to get some pat on the back for spending his weekend fixing the dumb error he made that nixed a week of work.

Re:What they don't mention...

[ggraham412]

Selling on the way down? More like people taking handsome profits in a bull market.

Let's analyze those "winners" and "losers". Someone who is long the Dow in the midst of a bull market and who would sell on bad news is also unloading the risk that we may be pretty much at the top. On the other hand someone who would buy the Dow in the midst of a bull market is acquiring the risk that they are buying at the top. So who is the winner and who is the loser here?

Re:What they don't mention...

[ggraham412]

It's just annoying that whenever something like this gets posted on slashdot, the knives come out for HFT. Yet it's pretty obvious that the market is overbought. Investors who are long in this market are playing musical chairs with Goldman Sachs, JP Morgan Chase, et al. Scary news causes jittery investors to run for the seats and take profit.

HFT didn't cause this situation. It is the fed who destroyed savings accounts and CDs and drove everyone into the stock market just to keep up. The music's going to stop someday and then, if you're long in the market, you'd better be ready to sell quickly.

Re:What they don't mention...

[RoTNCoRE]

If it's an algorithm making the trade on false news, you can't convince me that this is a rational market. You use the word "someone" falsely. These trades aren't mostly individual investors weighing their appetite for risk, it's banks and funds, using the capital aggregated from depositors, who are handed the losses or gains, having very little control over the entire process. And, 2008 proved the losses of these reckless institutions will be passed on to the taxpayer (the real loser). Until that gets fixed, the market is broken.

Retirement account

[JobyOne]

Damn the almost-perfect timing of my retirement account contribution this month!

Thanks.

[Fuzzums]

I want to thank the stock market, once again, for fucking, I mean speculating with my, no, our economy.
Traders don't give a shit. The man in the street gets fired because stock prices need to go up and up and up and then - oh surprise - they crash.
My world can do without stock market.

Here's the thing

[Sycraft-fu]

Bitcoin moves like a stock (a thinly traded one at that), not like a currency. You are making false equivalence here. This caused a 1% drop in stocks for a couple minutes. Bitcoin has a bid-ask spread higher than 1%. The US Dollar didn't move at all based on this, and indeed changes in value around 2-3% per year.

The criticism of Bitcoin's volatility is highly valid when it wants to be a currency. I wouldn't use stocks as a currency due to their volatility either.

aha!

[sootman]

"Stocks plunged and recovered within minutes"

See? The system works.

</sarcasm>

Re:aha!

[Anonymous Coward]

It did work. That's how markets how. Some people take dumb risks and lose money. More sober thinking traders/investors get the gains, and in the process correct the market.

Your sarcasm makes no sense. No one was hurt save the people taking the risks. That is how it is supposed to work.

Re:aha!

[luis_a_espinal]

When a large portion of the country is taking risks big or small, lose on those risks, and proceed to tank the economy. It hurts even those who did not take risks. Not everyone understands the repercussions of their risks. You should care about negligent risk takers.

So, what is the percentage of the economy that was directly/substantially afflicted by this brief fluctuation on the stock market?

Re:High Frequency Trading Systems Are Strong A.I.?

[maxwell demon]

You still think the financial crisis is man made? No, it's the first strike of Skynet!

Re:sex with a6 Gnaa

[mmcxii]

I often wonder at the posts the look like something being read on a numbers station... is it a secret message or is someone just bored, maybe crazy?

I'm stunned

[AvgCsStudent]

How did such a market-insignificant thing have such an effect on the market?

Lower transaction costs, but you're still screwed!

[girlinatrainingbra]

Yeah, but even if the transaction cost has decreased, they can screw you over in other ways, like timing your sale for the time of day they want to say it occurred so that you get the lowest possible price and timing your purchase for the time of day so that you get the highest possible price. The big brokers, as market makers, can game your transactions so as to make themselves, as market makers, the most amount of money and still be able to say with a straight face that "they carried out your transaction as you requested". They can also play on the "dark markets" where bigger transactions and movements occur, so that the rest of the market and the little schmoes never really see the momentum of the full market.

Easy come easy go...

[WaffleMonster]

sell sell sell

NASA reports asteroid on collision course for earth expected to "obliterate" housing market.

sell sell sell

Gold prices expected to reach a 20 year low as Lord Ganesh spotted on Indian TV favoring peanuts over gold.

sell sell sell

Acme Toothpick Company announces it will be laying off 1 million workers as the last tree in the amazon rain forest is cut down.

sell sell sell

North Korea launches devastating nuclear attack against giant sea turtles invading its territorial waters. Fears of radioactive fish expected to have catastrophic effects on east Asian seafood markets.

sell sell sell

Re:Easy come easy go...

[giorgist]

Wow are you trying to slashdot the market with keywords picked up by HFT scripts ? :-)

Exactly, put a gambling tax on it

[dutchwhizzman]

Don't ban it, tax it as gambling. 50% of profits go to government, losses aren't deductible. If you buy a stock and sell it again within a week, it's considered speculation and subject to gambling tax. This will make high volume trading not impossible, but much harder to actually make a profit with, while actual investors in stock that think companies will make money by honest profits are protected. This is for stocks. Any derivatives are by nature all speculation and should be taxed regardless of how long they are held before being sold, bought or exchanged for actual stock or product.

Re:Exactly, put a gambling tax on it

[NatasRevol]

I don't think you understand the timeframe of HFT.

It's subseconds. Not days.

Re:Exactly, put a gambling tax on it

[lgw]

So, basically, what your saying is "I don't understand most of how the market works, so please ban everything I don't understand." Your post reminds me strongly of a senator writing about copyright on the Internet.

Re:Exactly, put a gambling tax on it

[amRadioHed]

I'm pretty sure he's saying all short term speculative trading should be taxed as gambling, not just HFT.

Re:Exactly, put a gambling tax on it

[NatasRevol]

My point is a week isn't really short term. Your life could go very much up and/or down in a week.

Re:Exactly, put a gambling tax on it

[Algae_94]

You might not be aware of this, but stock gains are already taxed. There is a short term and a long term rate, with the long term (over a year) rate being more favorable. This is to encourage holding stocks for a longer time period.

Can you honestly not see any reason for someone to sell a stock within a week of buying it? What if a sudden life event occurs and they need that money immediately, or maybe some news story is realesed about a company that clearly states that it is a horrible company that will be out of business in a matter of months?

Re:Exactly, put a gambling tax on it

[Serious Callers Only]

Don't ban it, tax it as gambling.

So, basically, what your saying is "I don't understand most of how the market works, so please ban everything I don't understand."

No, since you didn't read the comment you replied to, I've repeated it here. They are *not* suggesting banning the activity, but restricting it with taxation to make it less attractive to profit from short-term fluctuations in prices - this would dampen volatility. Some volatility is a good thing, too much of it can be terrible for a market which relies on confidence to function.

A transaction tax sounds like a good idea to me, do you have any concrete objections to it?

Re:Exactly, put a gambling tax on it

[amRadioHed]

Your life can go very much up or down in an instant, I don't see how that's relevant. As investments go, I would say a week is still very much short term.

Re:Exactly, put a gambling tax on it

[SolitaryMan]

Means tough luck. Investment is risky. Afraid of losing your money? Don't buy fucking stock. Period.

Re:Exactly, put a gambling tax on it

[sFurbo]

They are *not* suggesting banning the activity, but restricting it with taxation to make it less attractive to profit from short-term fluctuations in prices - this would dampen volatility.
[...]
A transaction tax sounds like a good idea to me, do you have any concrete objections to it?

It could increase the volatility. If a tax was introduced, it wouldn't make sense to trade for small changes in price. When the prices change become large enough that it makes sense, the people selling would drive the price down further, leading more people to sell.

It would also lessen the liquidity, leading to worse prices. As it is today, I can sell my stock to HFTrs at close to the current value. If there were no HTFrs, I would have the choice of selling now at sub-optimal prices now or waiting in the hope that somebody would at some time would meet the price I want.

Re:Exactly, put a gambling tax on it

[Algae_94]

This isn't really a risk issue, dutchwhizzman was suggesting limiting the rights of a purchaser of a stock. Arbitrarily limiting someone from reselling stock they bought within a week is a terrible idea. The first-sale doctrine applies to stocks as well. If someone buys it, they have the right to sell it.

Re:Exactly, put a gambling tax on it

[SolitaryMan]

Those rights are already limited in a gazillion of different ways. You have weekends and after hours, when the exchanges are closed, you have policies against insider trading then there is stock manipulation and what not.

There is also a gazillion different ways you can lose your money with the current system. So, if you know beforehand that you can not sell it withing a week, all it comes down to is just risk. There is always a way to mitigate some of that risk, like insurance for example or not getting into this venture at all.

Initially, the point of investing is you lend somebody money, hoping that they will build a profitable and valuable business and you profit from that. People who do this directly, like angel investors, already facing these kinds of risks and they have a very limited opportunity to get their money back, if they change their mind, so this will hardly harm them.

Quote

[Gorath99]

If only the code picking the quotes below the stories was just a tiny bit better. Right now I see the quote for April on Mark Twain's "Pudd'nhead Wilson's Calendar". Had it been the October quote, it would have been incredibly apt.

October: this is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August and February.

Finger on pulse

[Mister Liberty]

Question is, which is finger which is pulse.

Re:Lower transaction costs, but you're still screw

[ggraham412]

What does any of that have to do with HFT?

Re:Lower transaction costs, but you're still screw

[girlinatrainingbra]

dude, read the GP post. I was replying to the GP post's contention that HFT has helped everyone, including the buy-and-hold-er by decreasing transaction costs. I respectfully disagreed. You may need to read in "thread mode" to see the give-and-take of the conversation to which I was responding. :>)

Anons on the case

[nightcats]

As I mentioned in a footnote to this piece (which I was writing while this all started), the Anonymous twitter feed had suspected a hack well before the AP delivered its confession. So if stock traders had been following Anonymous, they might not have had time for their panic sell-off. And BTW: what does it say about the stability of our markets and the people running them that such a report should cause them to melt down?

Re:Lower transaction costs, but you're still screw

[Anonymous Coward]

Did you know those trades in those "dark markets" get printed to the tape too?

Re:Awesome

[game kid]

The response to this "best troll / hack" will be a global manhunt for the tweeter, increased anti-hack protection for HFT systems, and complete ignorance of the real cure for this mess. (That, of course, would be the end of HFT and of trading-algorithms that rely on Twitter, now more than ever the easy-to-0wn InterNIC of social media. twttr's intruders might not get root, but this event proves a popular news service is close enough.)

And why is anyone surprised?

[cyberjock1980]

The entire trading market is a zero sum game. My gain is your loss. So naturally, having computers auto sell at low values and buy at high is a gain for those that choose to use it..and for the rest of us a loss.

Re:Lower transaction costs, but you're still screw

[lgw]

timing your sale for the time of day they want to say it occurred so that you get the lowest possible price and timing your purchase for the time of day so that you get the highest possible price.

My broker offers me a 2-second execution guarantee on most trades. Maybe you should look into that.

The big brokers, as market makers, can game your transactions so as to make themselves, as market makers, the most amount of money and still be able to say with a straight face that "they carried out your transaction as you requested".

I see my trades work as expected - if the bid or ask displayed is bigger than my transaction, I get that price or better. If the market is thin I'll use a limit or stop order to make sure I don't get burned. It's good to pay attention to this stuff when trading, but really it's not like a broker is going to cheat his customers without it getting noticed.

They can also play on the "dark markets" where bigger transactions and movements occur, so that the rest of the market and the little schmoes never really see the momentum of the full market.

The best scam of the past few decades was conning a con-man into believing there's some secret market on which only the super-rich get to trade. If your a broker on NASDAQ or the CME (NYSE, CBOT, etc), you're required to report all trades by the end of the day. All sorts of private deals can get brokered, sure, but if a broker is involved the transaction will show up. Of course, two private individuals can trade just about anything privately, but that's not the market (and for many securities, the tradxe still has to be registered the same day, because you're buying or selling a contract with that requirement written in!)

Re:Lower transaction costs, but you're still screw

[khallow]

Again, what does that have to do with HFT? HFT is not a huge label covering every way that you can get screwed on the stock market. It's trades that happen on a very short time scale. The gimmicks you mention can be done with human traders and don't require HFT.

Why did it even matter

[pclminion]

Suppose the White House DID blow up, and Obama WAS injured. Why the hell should this affect the price of corn?

Re:Why did it even matter

[uberuber]

I can think of a lot of factors. One easy example is if the attack was sponsored by say Iran, oil prices would shoot up on war speculation. That would cause a major input into the price of corn to go through the roof.

Re:Why did it even matter

[DMiax]

because it would most probably lead to a war, which is known to raise the prices of everything. I'm not saying it's rational to panic over a tweet, but if the news were true, markets going down and prices up is a logic consequence.

Re:Lower transaction costs, but you're still screw

[girlinatrainingbra]

True, and what did the initial hacking of the AP Twitter account have to do with HFT? Has anyone shown definitively that any burps that occured in HFT transactions were caused by the algorithmic automatic trading or that they occurred because of human intervention? Again, I replied to the contention of the (prior) GGP post, not to the concept of HFT in general.

"Think of it, Marty!" - Cosmo

[eyenot]

Wow, did I miss something?

See, I went out for pizza,

and then I went to Canada!

Re:Where do we start?

[the eric conspiracy]

1. Government spending as a percentage of GDP has been dropping since 2009. Some would say this is why the current recovery is so anemic. This issue is being addressed.

2. Arbitrage does not suck money from slower traders. It sucks money out of price differences across exchanges thereby reducing spreads. For an average Joe trader it's much more likely that having good arbitrage is going to be a benefit. Strong markets must have efficient price discovery and arbitrage.

3. The bulk of the people in the current system who do not pay income taxes are either retired or have incomes in the lower quintile. If you want to get people to have more skin in the game the way to do it is by having a broader income distribution; not by making the tax system more regressive. The US has a horrible income distribution pattern, one of the worst in the world, and it is getting worse. To get an idea of how severe this problem is, in 1980 the top 1% in the US collected 10% of the income. In 2010 the top 1% collected 24% of the income. The general population cannot possibly have skin in the game with this atrocious economic structure.

Re:Lower transaction costs, but you're still screw

[Anonymous Coward]

I am fairly sure no dark pool is allowed to execute outside of the national best bid and offer, at least for non-block trades
http://en.wikipedia.org/wiki/Regulation_NMS

Re:Lower transaction costs, but you're still screw

[khallow]

Has anyone shown definitively that any burps that occured in HFT transactions were caused by the algorithmic automatic trading or that they occurred because of human intervention?

Oh, ok. That is a good point.

To answer your question, I haven't seen any such evidence. However, there are a number of quotes from market professionals indicating that the market reaction to the twitter message was very fast. They might be lying - if one did fall for the message, it would be extremely embarrassing and damaging to your business if it became known that you lost a portion of your customers' investment portfolios to a fake news twitter.

But showing the involvement of HFT would require an analysis of the first few seconds of the stock markets after the twitter hoax message was released. I don't see any evidence that has been done yet. A reaction in say less than 100 milliseconds probably would indicate HFT scale trading (much of that time would be taken up by computer analysis and decision making acting on the twitter message).

The drop apparently lasted around three minutes, so I have to say that presently I don't see evidence for HFT involvement, but the evidence might support human-directed computer trading since several DJIA components were sold simultaneously over short times and the drop on the DJIA was a bit over half of what would have triggered a temporary stop of computer trading on the market (being able to reverse these trades would be an essential part of an automated strategy for reacting to news stories).

Behind-the-scenes avoidance of trading loss

[waterbear]

I don't see where the articles address the "reversing of losses" that the GGP cited. HFT may be flawed, but I don't see the items I questioned being addressed.

Yes, the questions were raised: Look in the '247wallst' article at http://247wallst.com/2012/12/04/high-frequency-trading-a-grave-threat-to-the-markets-and-the-economy/ and search for 'why' as in 'Why were the orders canceled?'

In other words, by some unknown mechanism, certain market participants were able to have second thoughts about their trades.

Their profit, or their cancellation of loss, was someone else's non-cushioned loss.

-wb-

Re:Where do we start?

[the eric conspiracy]

Yes, I am very serious.

Have you bothered to even research the issue rather than just listen to some talking heads on TV?

Information asymmetry

[NewYork]

Implementing https://en.wikipedia.org/wiki/Information_asymmetry#Adverse_selection would have prevented this mess.

Re:Where do we start?

[rickb928]

U.S. government spending as a percentage of GDP is really the wrong measure. Deficits compete for funds, or would if the Fed wasn't floating the bonds. Our currency is being devalued, which is a big reason why gas prices are as high as they are.

Yea, I pay attention. Claiming govt spending is anything but out of control and too high is, to me, a sign of inattention. Or belief in a statist solution.

I am not a statist.

Re:calm down HFT haters

[moeinvt]

Nobody is arguing against use of computers. People are upset that big brokerages are using computers to gain an unfair advantage in the equity markets. These markets are supposed to be a mechanism for honest price discovery, not a casino where the house always wins.

The big firms not only get asymmetric information, they are able to submit and cancel thousands of orders in a matter of seconds to steal gains from small traders. Shouldn't it be fraud?

Suppose you want to buy 100 shares of company 'X' at $10 per share and put in a bid. If someone puts up 100 shares at an ask of $9.75, your order is filled and the $25 difference should be yours. With HFTs, a firm wanting to sell 100 shares of company 'X' at $9.75 will just put out 125 separate 'ask' orders starting at $11 and lowering the ask price by 1 cent each time, eventually getting to $9.75. In the process, they hit your bid of $10 and just stole $25 that would be yours in a fair market.

A few simple rules would fix this.

1. All orders must remain open for a minimum of 3 seconds.
2. There is a fee for orders that are not executed. Say $1 for every 100 orders.

Wouldn't hurt the small trader, but it would be a serious disincentive for an HFT placing millions of orders that the firm has no intention of executing.

Yeah, HFTs provide "stability" which is why we keep seeing these "flash-crash" events.

"On April 22, 2013 at 9:37:11.500 (ET), Google Flash Crashed. The price dropped from $796 to $775 in about 3/4 of a second, then rebounded to $793 a second later. The drop involved 307 trades and 57,255 shares"

http://www.zerohedge.com/news/2013-04-22/autopsy-dead-market-google-flash-crash

Too bad your computer wasn't fast enough to submit a buy order in the 0.25s window

Re:Where do we start?

[moeinvt]

"Government spending as a percentage of GDP has been dropping since 2009."

Considering the fact that they cranked up spending from 20.76% of GDP to 25.24% in a single year 2008 - 2009, this isn't really saying much.

2008 20.76
2009 25.24
2010 23.83
2011 24.09
2012 22.75
2013 22.74

This year's federal spending as a percentage of GDP is going to be higher than at any time between 1984 and 2008.

Keynesianism is a failure.

Re:Where do we start?

[the eric conspiracy]

The question is why do we have the deficits we do? Is it because spending is too high, or is it because we've had a major recession which has decreased the tax base, or is it because the tax base has been reduced too much?

Hint: it isn't just because spending is too high. Anyone who is stuck on a simplistic explanation like that isn't paying attention.

Re:Where do we start?

[the eric conspiracy]

> Keynesianism is a failure.

Not helpful unless you have an alternative that works better.

Europe has been taking a monetary approach and is doing far worse than we are. Japan has been on a strong currency kick for decades leading to a stagnant economy and crippling deflation. They at least are trying something else now.

Re:Where do we start?

[rickb928]

No, it isn't Just expenditures. Most of our Congressmen have, however, aligned themselves into one of two camps; lower taxes and reduce spending, or maintain spending and raise taxes.

There is little support for a third action - reduce government services.

Remember, Medicare/Medicaid can well be described as an entitlement program, but Social Security was mot designed that way, and should not be characterized as such. My contributions to SSA were expected to fund the program. Attempts to reduce or eliminate my future benefits will be seen by me and others as robbery. Reducing Medicare benefits will just be another broken promise.

Both will get me involved, and my representatives do not like it when i get involved