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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.'"
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.
I want a list of atrocities done in your name - Recoil
Serious question: Does anyone know any day-traders? Everyone I used to know who did this gave up because of the robots.
They would know that people who execute a lot of trades get big discounts. HUGE discounts. If you are doing more than 20,000 or 100,000 trades a month, you start to trade at a fraction of the cost of a normal investor.
http://www.interactivebrokers.com/en/index.php?f=commission&p=futures3
With this fee structure, a HFT can get in and out and make money. A normal trader would lose money on the exact same trade. For the average guy, the trade might be profitable, but the trade commission is greater than the profit. Exchanges give a lot of incentives to traders who bring big volume.
I have a major issue with a system where two different traders make the exact same trade, but one loses money while the other makes a profit.
I'm not suggesting eliminating the lower fees for more active traders. I would like to see the gap between the highest commission and the lowest commission close. This simple change would work wonders to level the playing field. If the highest commission was limited to 130% of the lowest commission, the high frequency traders would lose most of their advantage.
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.
If HFT is the latest shtick in "providing liquidity", then it really is arbitrage. And by its very nature, do enough of that and the opportunities exhaust themselves. In fact, the infrastructure built to support HFT improves access for other traders, too.
I think taxes may not be necessary, and probably would do more damage than good anyway. The big trouble with HFT isn't the trade volume, but the "probing" volume, offers made then withdrawn so quickly nobody can take'em.
I'm with the NANEX bunch on this; simply require that offers be good for a minimum timespan so that completely fake offers are unaffordable, for someone might take the offer. That saves the cost and administrative overhead of another senseless tax that hits far wider than the problem it purports to solve, but then doesn't.
The main reason for HFT is to "front run" the market, to game the traditional customers of the price discovery mechanism, and make a risk-less profit. This dis-incentivises the market for everyone else, who see it as corruption and move their money elsewhere.
The big picture though is one of a big liquidity event, in which the velocity of money is rapidly falling as everyone tries to save up enough cash to ride out the oncoming greater depression. The rapid printing of money is showing up in the 17% growth of the M3 Money Supply, but is getting hoarded up by banks and corporations as rapidly as it's getting created. This is the only thing keeping inflation from at bay, for now.
Once the Tsunami of dollars starts to find its way to main street, and chasing goods and services, an inflationary wave will hit us all, and we'll learn to get used to $10/gallon gasoline, and they start to remember it fondly not much later.
The share tax in France and Italy doesn't affect us investors much. But if you're in to make a 30% return, you don't care about the 0.03%+0.03% buy and sell taxes anyway. It's only the traders, and they add nothing to the investment market, they're just skimming off some of the margin between buyer and seller.
IMHO, the biggest problem with the stock markets is delayed quotes. The big guys have the real time prices, the small guys have a fake price, from 20 minutes ago. This is a big problem with European stock exchanges. How can you have a market if you're lying to people about the current prices?!
That's what I'd like to see ended. The two tier price quote system.
The stock markets make us little investors deliberately ignorant of the true price, they then sell that ignorance as 'real-time-quotes- to the big guys. They should be forced to charge one fee to everyone for the same quotes, and stop deliberately deceiving investors into the market.
If the policy makers actually traded . . . they wouldn't be taxing it.
Schroedinger's Brexit: The UK is both in and out of the EU at the same time!
Beste way to kill off HFT and really level the playing field is to mandate a price per trade. The highest volume traders paying the same price per trade as the lowest volume traders would eliminate a significant portion of their advantage.
This way you don't get volume advantages - and only the HFTs that have a real competitive advantage due to strategy or technology will survive.
Traders don't help liquidity, they aren't buying a stock unless it can be resold, the liquidity is there already or the HFT guys can't HFT!
The spreads don't widen by the amount of the tax, we have these taxes in France and Italy. If anything spreads are tighter because the HFT guys aren't in that market picking off the middle ground.
http://www.economist.com/blogs/leviathan/2011/11/tobin-tax-again
Policy makers do trade. They just trade on inside information and make 20%-50% gains on every trade. You are a peon so you have to rely on blind luck to get your .03% or on a good day 10%.
Look at the reports, trading exploding 2 seconds before things being announced, etc... All of congress trades, they just have very different information and rules than you do.
Do not look at laser with remaining good eye.
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.
Why is Snark Required?
First off, politicians who claim that everything that ever will be invented has been invented is worse than retarded. Second, they're just looking for tax money. That's it. It's just about the money. If they could tax talking about taxes they would.
Tulip bulbs traded at the speed of light.
Where do you think many founders of HFT programs came from? Let's just say I know more than a few folks who commute regularly from Baltimore to New York.
I am very small, utmostly microscopic.
How do you determine holding time? If I buy 3 this morning, sell 2, buy another 5 at noon, sell 11, buy 4, sell 2, buy 3, what have I held, and how long have I held it? Is it first in, last out, or first in, first out? Do I get a tax refund for the time I held a negative quantity?
It's not a simple problem, and the solution is not going to be simple either.
When our name is on the back of your car, we're behind you all the way!
BY itself HTF is instant arbitrage that if it's done right assures that the market value for everything is precisely priced in terms of risk, rewards and aggregate demand at every instant. When that's true I can confidently buy a stock knowing it's not overpriced due to some off liquidity issue. And I can sell a stock knowing it's not underpriced for lack of liquidity.
Arbitrage is a from of knowledge equilibration.
Or in theory that's true. But what really happens is that if you jam enough noise into the system by making the HTF trades exceed the real information content being injected from "real" trades then the only people who can see the real signals are the ones capable of subracting off the HTF trades. That is the HTF traders can mask knowledge by intentional deceit for their own benefit. It goes off the rails when they are jammming so much noise that HTFs trade against HTFs and we actually increase volatility rather than reduce it.
So you want some HTF. But it should always be at a level just below the "real" trade volatility so that all the signals are visible and it's just arbitraging those instantly.
Taxing is a reasonable idea to fix the tragedy of the commons.
Some drink at the fountain of knowledge. Others just gargle.
If 100% of the human population in the USA died off and nobody lived there, the government would have the best regulated and quiet populace in the world.
But this isn't considered a good thing.
Just because HFTs are killing themselves doesn't mean that regulation isn't needed.
HFTs make the market inherently unstable. Trading day stocks does too, but the faster the trading the more instability there is.
And if HFTs are allowed, but drop out because they gain little profit? Then after a short while, there will be more profit in HFT trading, so people will move in again.
Boom and bust ring a bell?
The problem with the stock markets as they exist today is that there are two groups, those who have extra information (such as real time quotes) are able to better execute trades to take advantage of smaller possible profit margins but there are those who do not have access to all this information and so they can't engage in HFTs (well, profitably anyways) which skews the market.
The first step in the right direction is not more theft, but rather to eliminate delayed stock quotes and make everything be real-time.
Taxation is legalized theft, no more, no less.
"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."
No, No, No! This is an excuse to establish a "financial transactions tax". It is not aimed at the evil Wall St. bankers, it's aimed at the little people.
Your paycheck is direct-deposited? TAX
You contribute to your 401K? TAX
You make a cash withdrawal? TAX
You write a check to pay a bill? TAX
There are a couple of simple steps to stop the abuses of HFT. Of course, the government doesn't get a cut, which is why the tax idea will be popular in government. If we really wanted to stop the HFT abuses, it could be done with two simple steps. Maybe even one of these would suffice.
1. A minuscule fee for orders above a certain number which are not executed. Say $.03 for every order above 100. Wouldn't hurt the small investor, but would limit the practice of submitting and canceling millions of orders.
2. All orders must be valid for a certain human-detectable amount of time, say 5 seconds. It should not be acceptable to submit and cancel an order before a well positioned human could possibly react.
The markets are so rife with garbage like HFT and insider trading and so distorted by the Federal Reserve's "QE" and POMO policies, that they have ceased to fulfill their original purpose as a price discovery mechanism. IMO, the small scale investor is a fool to play in this market.
HFT needs to be stopped, it adds no value
That's not true, unless by smaller "Mom and Pop" investors the author really means semi-professional, day-trading arbitrageurs. I am a small time investor trying to make retirement savings grow by hunting for safe stocks with high dividend yields. What matters much, much more to me is that I can't get a decent interest rate on CDs or money market because of pro-Wall Street and pro-big bank FED policies.
Why does HFT matter to me? It really doesn't. Sure, in theory some HFT algo is going to snap up bargains ahead of me, but they're also shorting the bogeys so I'm always going to get the fair price. Stop the FUD.
So the market is correcting itself, right? Common sense is slowly winning out.
Never fear, government is here to make things worse. Always a day late and $10 billion wasted.
Gamingmuseum.com: Give your 3D accelerator a rest.
Except that HFT often doesn't actually make trades. Just bids to push the market to a more optimum place for the controller of the HFT.
I'm not sure that this will actually impact HFT much, if at all.
There are two types of people in the world: Those who crave closure
Not true HFT currently is 40-60% of the daily volume of trades
That is correct if HFT were to not work for a day the volume of trades would drop that much. HFT while adding liquidity are giving a false sense of volume and value for each market
i thought once I was found, but it was only a dream.
But they're pushing bids at 10x that rate, so that the trades actually made are profitable.
There are two types of people in the world: Those who crave closure
Wouldn't the best way to defeat the profitability of "high frequency trading" be to have a very small CONSTANT? A percentage is just the government skimming off the top.
Now keep in mind- I'm not an expert. If HFT normally operates within margins of 0.01% to 0.05% profitability, then this tax will work.
High-frequency trading is bad for normal investors, researchers say - Quartz
Also includes some details on how high-volume arbitrage (the actual issue at stake) works.
My quotes:
"Although the term “high-frequency trading” (HFT) is often used loosely to describe trading at high speeds by computers, in this case we mean something specific: high-volume arbitrage activity, which plays on small, temporary differences in price between, say, a security trading both on the New York Stock Exchange and DirectEdge.
[...] By anticipating future NBBO [National Best Bid and Offer price], an HFT algorithm can capitalize on cross-market disparities before they are reflected in the public price quote, in effect jumping ahead of incoming orders to pocket a small but sure prot. Naturally this precipitates an arms race [...]
[...] HFT doesn’t actually make markets more efficient. It’s great for those who practise HFT, but it reduces profits to everyone else, because in those few milliseconds before the NBBO is calculated and disseminated, the high-frequency traders carry out deals at a price that favors them.
In fact, [...] the difference between investor bids (offers to buy) and asks (offers to sell) is wider when arbitrageurs get into the mix, meaning neither sellers nor buyers in the non-HFT world are getting the best price they could."
In the long run we are all dead. - John Maynard Keynes (1883 - 1946)
"There is a single fee for real time market data and everyone can buy such a feed."
That's still two tier, the 'free' quote and the paid for quote. I put 'free' in quotes because the stock market gets the trading fee. They are after-all, a market and quoting a price is what markets do, offer something at a price and accept the bid on it. Both option are *paid* for options. Only one of them has the market offering a fake price it doesn't intend to honor.
The regulators should step in and require the markets to remove the price deception.
Basically this holds that a large public market is information-efficient. That is the current market prices reflect all publicly available information.
There are a variety of variations on this theme which mostly reflect the strength of the adherence to the hypothesis.
My particular belief is that the semi-strong form of the hypothesis is probably the correct one. You may have temporary bubbles, and markets that have poor disclosure requirements can be inefficient; these disallow the strong form of the hypothesis.
The main reason for the semi-strong being correct is that even market insiders with the best analytical tools are unable to consistently outperform the market averages. Most mutual funds, hedge funds, pensions and endowments actually underperform the market when trading costs are compensated for. Those that do outperform cannot do it on a consistent basis. There is no correlation between good performance one year and the next.
The idea that the game is rigged and only insiders have a chance is provably wrong. An individual investor using minimum cost passive investing strategies and good diversification will consistently outperform professionally managed portfolios just because of the lower costs. Any advantages that deviations from EMH are too small to overcome the trading costs needed to take advantage of the inefficiency.
Now that HFC trading is mature, it is showing the same efficient market behavior. It just isn't worth the costs because the market has wrung out any advantages of this mode of trading.
http://en.wikipedia.org/wiki/Efficient-market_hypothesis
Something like 97% of the finnacial traffic are buy/sell bids that are never consumated. They are a part of the these HFT algorithms to explore prices. If tax bids too, even at a much lower rate than proposed, you put the brakes on much HFT traffic.
Hocus Pocus "Microsecond Arbitrage" - traders must not read good fiction.
If your only tool is a hammer, every problem becomes a nail.
Assume a stock costs 1$ & a regular joe buys 100 units - then he is taxed .03% of 100$ - i.e. .03$ or 3 cents.
If he buys and sells it a 100 times, then the total transaction worth is 100 * 200 = 20000$. Per transaction he will pay 3 cents. So totally 200 * 3 cents = 6$. i.e. .03% of 20000$ - So how do you get the 3%?
Seeing someone's trade, buying the stock and selling it to them at a markup, has been illegal for decades as front running.
I favor the tiny tax on trades however- lots of trades are no longer done on the market floors (billions of dollars worth of billions of shares).
Not sure if the taxes will hit those markets.
A tiny tax would cut down on the false trades.
I think if you offer a trade, there should be a cancellation fee (instead of this tax).
That would kill 99% of the price manipulating uses of posting and immediately cancelling millions of trades.
She was like chocolate when she drank... semi-sweet at first and then increasingly bitter.
HFT may sometimes increase volatility and sometimes decrease it. Overall, there is little evidence that there's a need to act.
But a transaction tax means massive new reporting and data collection on every financial transaction. It probably would require data exchange between all major tax authorities, and the imposition of US rules on foreign financial markets. It also means that any transaction or contract will now have to come under suspicion of being a proxy for a financial transaction that might otherwise be a taxable trade.
I can't figure out how anybody can at the same time get upset about NSA spying and then support such legislation. It looks like people won't rest until every paperclip purchase, every phone call, every trip, every e-book page read, and every bit of our medical information has been reported to the government and exchanged with governments around the world. Of course, each of these regulations has a separate group of people making excuses for them: "for the children", "for financial stability and fairness", "for anti-terrorism efforts", "for your own good", or whatever else excuse-du-jour people come up with.
In these days of connected everything, why should they need to go through someone with a seat on the exchange? Why can't the seller post their bid, and the buyer accept it, with no middlemen other than the exchange itself?
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.
Someone really needs to remind our government that the purpose of taxes are to fund government operations, not to attack perfectly legal behavior that you happen to not like.
A tax on trades in a US market will have *0* effect on HFT. All it will do is cause the trading to move to a different country that doesn't tax these trades.
It is a completely 100% moronic idea.
It's not only that stock exchanges have become gambling halls. It's worse: the HFT traders are the card sharks that any self-respecting casino bans from their premises.
If the markets themselves want to act like respectable gambling institutions, they need put a brake on this. The simplest means would be to charge big fees for cancellations. If Flash asks "would you like to buy an apple for 51c", and the answer is yes, then he had better buy the damn apple.
The liquidity argument is specious; there really is no benefit to liquidity below a certain threshold. Fees should also go up astronomically for very short-term trades.
Enjoy life! This is not a dress rehearsal.
Nanex presented a video that shows 0.5 seconds worth of High Frequency Trading for the stock Johnson and Johnson. Pretty revealing.
Ronald said nothing. He flung himself from the room, flung himself upon his horse, and rode madly off in all directions.
Wall Street has some social value, but it also has considerable social expense... Stock/commodity/bond markets are not capitalism.
Our markets aren't perfect, but if you started from scratch to devise a way for people to buy and sell fractional ownership of the enterprises that humans naturally create in order to efficiently meet consumer demands, you'd end up with something pretty similar to what we have now.
And free markets have immense social value. They have lifted far more people out of poverty than any wealth-redistribution effort ever has. In fact, it wouldn't surprise me if all wealth-redistribution efforts have been counterproductive in the long run. (E.g., if the poor of country X end up having 5% of a $1 trillion GDP coercively redistributed to them, they are much worse off than if they receive 1% of a $10 trillion GDP via voluntary acts of charity. Yes, less economic coercion causes a boost in the rate of economic growth which, if compounded over a few decades, easily means the difference between whether country X has a $1 trillion GDP or a $10 trillion GDP.)
That that is is that that that that is not is not.
So, instead of making money off of researching the viability of stocks, let's prop up the market on millisecond trades based on the trend some statistician found where brick and mortar prices dip for 5 minutes when everyone is taking a post-lunch shit. Nothing to be worried about here...
I swear to God...I swear to God! That is NOT how you treat your human!
Shouldn't you read the news first rather than spout "YOU HAVE TO TELL ME WHAT'S GOING ON FIRST"?
Of course. And fortunately for my rhetorical standing, I have read the news first. You may move on now.
High Frequency Trades are abiotically generated by artificial node-gysms that infest the innermost belly-mantle. They execute on a timescale that is so distantly small from our own thought process they manage to knit cause directly to effect.
We operate within a lovely gylophagous gygantsm of our own devising. But there has always been human delay between cause and effect. Any system that has managed to knit cause and effect together and has evolved beyond thought-time becomes a paroxysmal gygantsm.
Gygantsae are set in motion as a single primordial gysm effects itself, or triggers causes in other gysms as they are introduced. As the expanding wave of possibility and permutation becomes practically unbounded a rolling glysm forms. It is convenient to think of glysms as expanding spheres whose behavior along the surface may be theoretically predictable, but its interior is comprised of behavior that may be possible to define but is always impossible to divine.
If a glysm coalesces from others and still others find stable orbits of context within them --- they form 'bellies'. Because Buddha has a big one and he is smiling. These are the belly-mantles, nested like so many Russian Dolls. It is convenient to think of bellies as constructs of geography-time within which transactional behavior occurs.
In the macro-belly-mantle we have index trends over time, predictable lifetime notions of people and corporations behaving in ways one would expect. This outermost foundation-belly is the one demonstrated and taught. These things are taught as if there is a rational basis to every decision. In the slowly rolling glysm of the macro-belly both history and textbook are written as the great-circle paths along its surface.
At this level economists work and play. They attempt to geographically map and narrate the macro-belly with glimpses below the surface to the glysms beneath; at this scale subterranean features are visible The do-belly is the most prominent structure effecting the macro-belly and its protrusions effect the surface, much as plate tectonics effects a planet.
Then we come to the do-belly-mantle which is layer of discrete events caused and effected by people, politics and careers. It is a do-belly because if you've ever done something or had something done to you by someone and it cost someone something, it happened in the do-belly.
It is the do-belly which economists feel comfortable modelling as a simple series of 'zero-sum games', mainly because they are too sociopathic to realize that when bad things happen to individual people, those people effect those around them, polarizing a range of empathy (opposition to indifference to altruism) which spawns a thick chaos of cause. If something happens to you and you understand why, your chain of reasoning is a great-circle path along the do-belly but no zero-sum model could predict what happens next unless you are completely alone. Fables and parables serve as culture's medieval maps to the great do-belly.
That 'liberty and the pursuit of happiness', that is a do-belly thing.
From the renaissance into modern time the poker-belly-mantle has evolved. It has become a seething glsym of mostly-beneficial wonder and miasma. This belly lives within the do-belly and its horizon is defined not as a scale of time or even behavior but perception. It is the multitude of decisions that are caused by or intended to effect the disembodied "market" itself. The best way to describe it is by example.
If you buy stock in a company to hold as an investment you are a do-belly even if your primary motive is to make money --- because your decision has thought-symbols for you and the company. If your purpose is to ride financials or short techs it's poker. But it crosses the boundary.
Warren Buffet lives in the do-belly. He has mystified folks all his life by doing this. He operates exclusively from a state of conscious transactional awareness. Win or
<blink>down the rabbit hole</blink>
https://en.m.wikipedia.org/wiki/Tragedy_of_the_commons
Casteism