Have We Hit Peak HFT?

CowboyRobot writes "There was a time when people wanted the fastest networks so that they could trade at lightning speeds. They deployed the smartest formulas at trading venues where no one could know who was asking for that big block of stocks on the other end of the deal. It was a wild time and people made a lot of money along with some very unwise decisions. Wall Street seems to be acting out the lyrics to a Don Henley song. The party's over, the hangover is raging and no one really knows what happened the night before. The number of shares traded via high-frequency trading are down and politicians want to roll out a tax to serve as a speed bump. Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio want a .03 percent tax on nearly every trade in nearly every market in the U.S. Some are wondering if microsecond dealings are poised to fade away. As the founder of HFT firm Tower Research Capital Mark Gorton puts it, 'The easy money's gone. We're doing more things better than ever before and making less money doing it.'"

Comments

Good

[clickclickdrone]

HFT is a symptom of a deeply broken system. We need to really start to recognise that profit isn't all and long term stewardship of our instituitions and systems is key to our long term quality of live. For everyone.

Re:Good

[Anonymous Coward]

It's 0.03% on everything, not just HFTs, so it has to be small. The intent is to tax people who make money on trade volume rather than on trade value, which is a larger issue than just the speed at which trades are executed.

Re:Good

[peragrin]

Something like 60% of the active volume of trades are HFT that is lasting less than a second. That isn't investing in a company that is gambling.

The other problem is the economy is growing at maybe 1% a year and the entire stock market is doing 10-15% Sure some companies are growing that way but there is a major disconnect between how wall street is growing and the rest of the world. If Wall street is supposed to be about individual company profits how can it be growing so far beyond the companies that are represented in it?

Re:Good

[StripedCow]

Anyway, the tax should of course be on short-term investments.
The shorter an asset is kept, the higher the tax should be.

If this is too difficult to implement, then perhaps a tax per transaction will do, indeed.
If a HFT trader makes a profit of 0.03% per transaction then this tax will make HFT trading unprofitable, while leaving long-term investments mostly untouched.

The effect will be that the frequency of trading will go down. The question is whether that will be sufficient. (Holding on to a stock for a day instead of a few milliseconds is not going to be a huge improvement in terms of long-term investment and long-term vision).

Re:Good

[Lumpy]

Really? 0.03% will lok out small investors? If 0.03% makes things too expensive for you then stop trading in penny stocks.

Re:Good

[Rockoon]

This will kill the ridiculous business of racing for fastest connection and smartest trading algo, which is *good* because it is a ridiculous and useless business.

That is not a reason to consider it "good." Essentially you are saying "I dont like how he makes money, so lets punish him"

For it to be "good" there needs to be a positive effect. Please explain what the positive effect is, because I dont see it. I see the HFT offering bids and asks that are better than everyone elses .. how is discouraging better prices for both buyers and sellers a good thing?

Seriously.. explain it to me without resorting to a hatred. Explain to everyone why it is that when they get a higher price when they sell and a lower price when they buy that its "bad." I happen to like paying less for things when I buy, and getting more for things when I sell.

Re:Good

[locofungus]

60% being HFT doesn't sound unreasonable to me.

Given that market makers are, almost by definition, going to be doing HFT and there will be a market maker as counterparty to any investment trade, the "perfect" market would have 50% HFT matching buyers to sellers.

There is certainly an argument as to whether market makers are really required but, in practice, if they're not there, then I can't see how there can be any more trust in the stock markets than there is trading in ebay.

It's essential that when I buy I know that the stocks will be delivered and when I sell I know that I'll be paid. On ebay I factor in the fact that I might never get the goods into the price that I'm willing to pay.

Tim.

Re:Good

[sjames]

They are already charging you for the currency exchange, why not a tax?

Keep in mind, the proposal is 3 one hundredths of one percent. That is 3 cents on $100.

Re:Good

[TheDarkMaster]

Is good. HFT distorts the purpose of a stock exchange, the idea of having shares in a company to help it to capitalize, make it succeed and you earn a share of the profits in return. A company needs partners (the shareholders), not parasites.

Re:Good

[gbjbaanb]

there was an example of the broken financial system on the news last night.

Basically Guinea (IIRC) has some mountains that are 60% pure iron, so the (allegedly corrupt) dictator of Guinea gave the mining rights to an (allegedly dodgy) mining company.

Said company then didn't bother to mine the iron, instead it used the backing of having a huge iron asset to make trades on the markets and made a load of cash that way. Meanwhile the people of Guinea are dirt poor with no hope of even getting jobs digging said iron out of the ground for 10p a day, let alone seeing the extraction of the iron benefit the country's economy.

This is one way of seeing why a financial market that does nothing but deal within itself is a bad thing. If we changed focus so stock markets were tied to something in the real world (eg Microsoft profits, or Apple growth) no matter how tenuous, that you held for some time because of that real-world item's worth wrt the stock then we'd see stock markets become more investment based and less trade based.

We might as well base the stock market on TV shows - you could trade on the love life of some TV character without any difference with how financial companies trade today.

Re:Good

[sjames]

If you're just going to throw chaff, I'll say that flash prevented Geoff from buying the apple from Jim for a dollar and giving it to Jon just because.

The simple fact is that if you put two people in a room who want to make a transaction, they will do so if both are reasonable. Both lose if someone inserts themselves into the deal and bleeds a few cents out. The HFT make money somehow, and since they DO play a zero sum game, that means they make it by causing others not to.

Re:Good

[um... Lucas]

It seems far from a "the rich are too rich" type of tax. It would apply evenly to a hedge fund manager or a 20 year old making their first IRA contibution. A 0.03% tax would go unfelt by that 20 year old and it would also go mostly unnoticed by a Warren Buffett. Heck it would go unnoticed by a trader sitting at home. The rules would be the same across the board, but someone executing a hundred trades per second would be the only one who would feel an impact.

Re:Good

[dpilot]

I like what you've said, but let's phrase this in a simpler, more basic way.

Once upon a time, I thought that the stock market was supposed to be a mechanism for investing in companies - a way for them to generate money to fund their real-world growth. I suspect that some of that is still happening, but from what I can see the stock market has largely turned into something else.

To me, these days the stock market looks more like a sanctioned gambling parlor. Even IPOs, which one would think of as the ultimate in funding growth of a new company, are at least partially viewed as a way for the founders to cash in. (or out)

Re:Good

[ax_42]

Jim is standing over there, and shouts out "50c to buy this apple". Flash the wonder asshole stands close to Jim, so he hears this first. He then runs to Jon at the speed of light (which is faster than sound) and asks Jon "Would you buy an apple for 51c?". Jon says "why yes, that sounds reasonable". Note, Jon would, by definition, also be happy to pay 50c for the apple. But Flash is a fast fucker, and the sound of Jim's call hasn't reached Jon yet, so Flash buys the apple and runs to Jon and sells it to Jon at the higher price.

In economic terms, Flash has pocketed the surplus 1c, which would otherwise would have accrued to Jon (as he would have paid 1c less than his maximum). Sounds great so far, Flash is benefiting from his l33t running skills, Jim got his price (50c) and Jon paid what he was prepared to pay (51c).

Except it's not that simple, or rosy.......
First of all, Flash is running between willing participants in a market, adding no value to anyone but himself (arguably he is destroying value by forcing the exchanges to put in more and more expensive infrastructure, which everyone in the market is paying for). The fact that Jim sells his apple a microsecond faster is not relevant to a normal market participant.

Second, and much worse, Flash is not actually asking Jim "would you like to buy an apple for 51c". He's asking "would you like to buy for 51.05c", ah, no, "how about 51.049", no? how about "51.048" and so on (creating and cancelling orders all the time, massively loading up the system). Simultaneously there are two possible ways he's trying to figure out Jim's minimum price -- he's either asking Jim "sell for 49.99?", "49.991?", "49.992" ....until Jim says "yes" or, if he's a real scumbat, saying "I'll give you 50.5" and when Jim says "OK", say "Hah, made you look, order is cancelled, how about 50.45" and because he is so quick, he can cancel before the order fills.

Oh yes, and if you screw up, you go plead to the market to get your positions reversed. And because you pay so much to the market in fees (stock exchanges are companies, which charge traders to participate in the market), the market turns a blind eye.

And that, kids, is why HFT is fucking antisocial scum -- they manipulate the markets for their own ends, squeezing out surplus for only their own benefit. They add no value to anyone but themselves (increased liquidity is a trope -- no normal investor needs microsecond delivery). They've corrupted their system of oversight (the exchanges) to be dependent on the fees they pay.

One solution: ticked trading, bids and offers get queued and matched at a fixed interval (say every 0.5s), this would kill HFTs immediately as you can no longer run between Jim and Jon faster they can communicate themselves.

Alternative solution involves tar, feathers, a rail and a town.

Re:Good

[AK Marc]

HFT is not day trading. Day trading (by those I know who make/made a living at it) was based on movement trends. One person I know, buys on all bad news. The people who hear bad news usually over-react, and you get the immediate dip, and then a quick 5-10% bounce up, then a slow trend back to baseline. She made good money on the "bounce". Another would trend things, often tracking a few stocks (5-10 in a single industry) and when there looked to be news affecting one over the other, or there was an unexplained drop in one of spike in another, he'd buy/sell accordingly.

HFT is a pile of leaches looking for someone placing an order, then buying shares, waiting for the already placed order to catch up with them, and selling for a profit to someone who placed their order first. It's gaming the system to abuse the more casual traders. If HFT stopped tomorrow, there would be an improvement in the market. HFT is a bad thing for everyone who doesn't profit from it. The market should be adjusted to remove the arbitrage leaches.

The profits have been competed away

[Bruce66423]

As economic theory would predict, the money that was being made by HFT isn't any more because more and more people are getting to play the same game. The virtue of HFT is the liquidity that it brings to the markets, but at the cost of possible software caused chaos, as we've seen on a few occasions. On the whole it's probably worth tolerating, because the alternative is likely to see 'regulation arbitrage' as players go round any new rules.

HFT is organized theft

[Required Snark]

HFT divides the financial universe into insiders and outsiders. The resources required to compete are beyond the means of any but the most sophisticated and connected organizations. Any system that requires low millisecond access to the data stream is overtly biased towards the few. If you think you can participate by buying stock in companies that do this and share the profit you are showing gross stupidity. It's just like making hedge fund money; by definition, anyone below the top .1% is locked out.

Real world value does not change in millisecond increments, except for earthquakes and nuclear holocaust. Therefor the profit in HFT is extracted by decreasing value for non-HFC entities (that would be you). It's analogous to entropy.

The value extracted by the insiders disproportionately degrades the system for everyone else. It's equivalent to oil production in the Nigerian delta. The people who live there have a horribly destroyed environment, and people far away make huge profits.

HFT is vulnerable to mistakes and deliberate manipulation. Can you say Flash Crash? Remember, there is no real time way to tell the difference between a misbehaving algorithm and a deliberate market manipulation or a hostile attack. It's not even clear that you can differentiate after the event is over.

Anyone with a shred of self preservation should be scared shitless by this situation. For Wall Street HFT is a sacred institution, and any attempt to reign in the abuse is treated as an attempt to defile a holy site. They own the casino, and given the centrality of international banking institutions, everyone is forced to bet no matter what.

Wall Street types should be treated like meth freaks with rabies, because that's how they behave. They are actively dismantling the world economy for their own individual gain, and if they are not stopped there will be nothing left to save.