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

[gd2shoe]

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.

Mostly true, but simplistic.

HFT is a symptom of a deeply broken system. It brings liquidity, which is good, but it has tended to move the market in unreasonable (and sometimes dangerous) ways. So many trades today are HFT versus HFT that it obscures the real markets. We've seen several clear instances where computers are terrible at predicting the real market values when the primary data they're competing against are the actions of other computers. HFT doesn't lead to good price discovery, it obscures it.

When talking about long-term stewardship of institutions, we really need to move away from unreasonable earnings expectations every quarter. When the focus of the market is on ever narrowing periods of time, corporations simply cannot properly invest in the future. Yes, some corporations are lead by unusual people who can leave market panic behind them and truly lead... but most companies are run by very smart idiots.

Ultimately, stock/commodity/bond markets are about profit. There is nothing inherently wrong with that. The question for the rest of us is: what is the social value? Wall Street has some social value, but it also has considerable social expense. Sometimes we forget that. We also tend to forget that "the markets" are still based upon similar principles that brought us the great depression. Yeah, they're more sophisticated now. Yes, there are "regulations" (occasionally enforced). But the market CANNOT bring prosperity by ignoring it, and letting it run on its own.

Stock/commodity/bond markets are not capitalism. They are merely outgrowths of one particular variation on capitalism. They're finicky, hard to properly balance, and break if you try to exert too much control.

Re:Good

[SlashV]

then why not tax per volume traded?

It *is* taxed per volume. 0.03%, which it nothing for a normal transaction. But for someone who buys and sells the same stock a hundred times per day, just to profit from tiny fluctuations in the stock value, it's 3%. 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.

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

[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

[um... Lucas]

a 0.03% isn't a tax per share it's a tax on the dollar value of the final trade when executed - whether it's one share at $100,000 per share or 100,000 shares at $1 per share, the tax would be the same. There'd be no incentive by anyone to favor more expensive shares over cheaper ones.

Re:Good

[um... Lucas]

High frequency traders like to say that they are helping the markets by providing liquidity. THat's false - it's fake liquidity. They're not market makers who must post bids and asks at all times, it's fake liquidity that's only there when its convienenty. As soon as there's a spike or crash, that liquidity vaporizes. Same with your bids and asks that you're pointing out - a HUGE percentage of HFT orders are cancelled within microseconds of being placed - those bids and asks might look like they're there, but most of the time, they're not there at all.

High frequency trading is one of the few activities out there that trully provides zero benefit for society, and in fact creates expenses that the rest of us have to pay for. Exchanges need to beef up their computer systems in order to handle all the volume that could be unleashed by the HFT crowd; that's an expense that's getting passed on to all of us, not just them. The extra liquidity promises are false. And the whole system can fall apart and wreak havoc, either on the markets as a whole or to participants, just due to shoddy programming (think flash crash, think Knight Capital). Meanwhile, it prevents real price discovery from occuring, no one can discerne which bids are real bids by interested investors versus which ones might disappear the second you try to fill them.

I'm sorry. I'll defend derivatitves, hedge funds, mortgage backed securities and nearly anything else in the capital markets, but high frequency trading is not anywhere on that list.

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.

If the policy makers astually traded

[ebonum]

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.

It's only natural.

[Anonymous Coward]

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.

Front Running

[ka9dgx]

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.

Fix 'delayed prices' scam

[Anonymous Coward]

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.

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.