HFT Nothing To Worry About (at Least In Australia)

angry tapir writes "Although software-driven high-frequency trading has got a pretty bad rap (being blamed for the so-called 'Flash Crash' in 2012 for example) Australia's chief financial regulator ASIC says that, in Australia at least, it's not cause for concern. After an in-depth study of HFT in Australian markets, ASIC decided to hold off on previously considered regulatory changes (such as implementing a 'pause' for some small trades)."

Comments

Obviously?

[fuzzyfuzzyfungus]

Why would ASIC be concerned about software-based traders? They know that, while it renders them somewhat inflexible, they are both far faster and substantially more power efficient by doing it in hardware...

Re:Obviously?

[ebno-10db]

Don't laugh. I had a friend who was working on doing parts of HFT in FPGA's because the software wasn't fast enough.

Screw The Big Traders

[DexterIsADog]

I'd like to see HFT banned, or taxed, or slowed down in some way, just because the big traders use it and their millisecond advantage over the non-insiders to steal a small percentage on each trade. They amass billions by siphoning it away from the majority of people in the market, and in return give us nothing of social value.

Re:Screw The Big Traders

[DexterIsADog]

Since you apparently only learned to read yesterday, I'll just suggest you google HFT and the big houses' access to market data a few milliseconds earlier than the rest of the world, and let you educate yourself. You probably don't think much. Ever.

Re:Screw The Big Traders

[punker]

That's highly inaccurate. The big HFTs no longer make much money, because like most technologies, it has been understood and adopted. Their margins have dramatically receded since the mid-2000's, because all the market-makers (i.e. the bank you place your order through) also have their own high speed machines.
            Now, to the part about giving nothing of social value, well that's not really true (and in this context, social value applies only to stock market participants). What they provide is liquidity. When you place your order, the HFT programs are often buyer that make sure your order clears as you entered it. They do capture a very small amount of bid-ask spread (on the order of .1 cents/share these days), but they aren't taking it from the traders. They are really taking it from the market-maker banks that clear the orders. These banks have always captured the bid-ask spread (the positive difference in price between the seller's price and the buyer's offer). And this is where the positive part of HFT comes in. Spreads used to be fairly large (on the order of 10 cents/share in the late nineties). Now, they are measured in tenths of a cent. So the buyer and seller (i.e. the people in the market) now keep 9.9 cents of the 10 cents they used to lose to the market maker banks, because the HFTs keep spreads tight.

Re:Screw The Big Traders

[swan5566]

"They amass billions by siphoning it away from the majority of people in the market, and in return give us nothing of social value."

How are they "siphoning" anything away from a majority of people?

How are they giving nothing in social value? The money these people make they spend on other business ventures, familial needs, education, healthcare, charity, do you have any evidence at all that this money is going into a black hole of sorts?

I thought not.

So would the guys a few milliseconds behind - that isn't a relevant point. And that's not even what the parent was referring to about "social value". They mean about giving a sense of "worth" to publicly traded companies, which compels them to make sound business decisions. And the "siphoning" refers to a lack of a "level playing field", which is the reason we have laws against monopolies, price-fixing, etc...

Re:Screw The Big Traders

[ggraham412]

There is so much FUD around HFT it is hard for people to think rationally about it. I had wasted the following study on a troll once already earlier this morning and therefore it would be a shame not to repost it: http://online.wsj.com/public/resources/documents/HFT0324.pdf

Maybe someone may be bothered to actually learn something about HFT before they declare it the spawn of Satan. The upshot: "Based on the vast majority of the empirical work to date, HFT and automated,competing trading venues have substantially improved market liquidity and reduced trading costs for all investors. Share prices are almost surely higher as a result of this reduction in trading costs, benefiting long-term investors. Higher share prices also have favorable implications for firms\ cost of equity capital. " Exactly, and that makes FUD out of the sentiment that HFT is somehow squeezing out mom and pop investors, or siphoning billions out of the market.

In fact, do you know who doesn't like HFT? The investment banking arms of too-big-to-fail banks. Yes, they run HFT operations as well, but they would love to see a return to the days when the roost was ruled by the company with the biggest pile of money instead of the other guy who had better technology. Every time one of these articles shows up I am amazed by the number of supposedly technically minded slashdotters who come out on the side of big banks over the guys who write software for a living, and the trolls who can't be bothered to even understand what HFT is before they attack it.

Re:Screw The Big Traders

[Anonymous Coward]

Thing is that is a GOOD thing.

You are creating a fake surplus.

Lets say person one sells for X.
Person two wants to buy for Y.

In the normal world X and Y would meet at price Z somewhere in the middle. X walks away with a little less (or more) money. Y ends up paying a bit more (or less) than they wanted but not much.

Now lets put a middle man in the mix. The middle man will buy at X if X lessthan Y then turn around and sell at Y to the other guy and pocket the difference. So Y ends up paying more than the market would really bear and X gets a little less than the market would really bear. Both buyer and seller are in effect screwed in the deal. The only one who wins is the middle man.

This has the effect of over inflating the real true market value by on average abs(x - y)/2. Now do that several billion times per day.

HFT is not about liquidity. It is about pocketing the difference because person 1 does not talk directly to person 2.

Want to know what squeezed out the margin? The internet. People can more closely see what is going on at a much faster pace. So the difference between x and y is much smaller.

Re:Screw The Big Traders

[Hatta]

How are they "siphoning" anything away from a majority of people?

Easy, the value they extract through arbitrage would otherwise be retained by the parties making actual trades.

How are they giving nothing in social value? The money these people make they spend on other business ventures

So do any other sort of theives, what's your point?

Re:Screw The Big Traders

[Hatta]

The HFTs are paying the stock exchanges a fee to have access to faster trades. The service HFT provides is market making

If that was a valuable service, the stock exchanges would be paying the HFT guys, not the other way around.

Banks borrow money at a lower rate and and lend money at a higher rate creating profit with each transaction. This was seen as immoral at various times in history, but now we know this serves to create liquidity.

It's still immoral, despite creating liquidity. There's absolutely no reason we couldn't create all the liquidity we want with non-profit, publicly owned financial institutions.

Re:Screw The Big Traders

[aaarrrgggh]

I do actually appreciate the value HFT brings to liquidity as a market maker. When I trade, I want to use a limit price rather than a market order, and see my orders filled within 5-10 minutes so I know if I need to adjust my price before I go to work or whatever; trading small-cap stocks I appreciate that it doesn't work quite this way in all markets.

What I have a problem with is the other games that HFT plays with algorithmic trading. Edging out arbitrage on a narrow buy/sell spread is much different than playing momentum with fast trades to disrupt the market for financial gain.

Re:Screw The Big Traders

[TsuruchiBrian]

If that was a valuable service, the stock exchanges would be paying the HFT guys, not the other way around.

It's also profitable, which is why the stock exchange can charge the HFTs and not the other way around. Supply and demand.

It's still immoral, despite creating liquidity. There's absolutely no reason we couldn't create all the liquidity we want with non-profit, publicly owned financial institutions.

We already have them, they are called credit unions. And even credit unions charge more interest to borrowers than they give to depositors. This is how they can pay for business expenses like buildings, websites and the salaries of their workers.

If you think it is immoral to charge interest, then I suggest you refrain from being complicit in this immoral system by never taking out a student loan or a car loan or a mortgage. You should also lend other people money interest free so they don't need to turn to immorally usurious banks.

Re:Screw The Big Traders

[Hatta]

We already have them, they are called credit unions.

Exactly. So why should banks be legal? They provide nothing credit unions don't, and cause immense amounts of crime. e.g. the 2008 financial crisis was bigger than all property crime put together by a factor of 100.

If you think it is immoral to charge interest, then I suggest you refrain from being complicit in this immoral system by never taking out a student loan or a car loan or a mortgage.

So you're implying that I'm a hypocrit for living in the world I actually live in, instead of pretending that I live in the world we should strive to live in? Some things don't work until we all decide to do it. Some of those things work a lot better than the non-cooperative alternative. This is what government is for.

You should also lend other people money interest free so they don't need to turn to immorally usurious banks.

I'd go even further and abolish the idea of lending and private ownership of capital. Whoever needs the resources most should get them. This should be determined democratically, instead of autocratically.

Re:Screw The Big Traders

[ggraham412]

What you describe is exactly what the world was like before HFT. Except the man in the middle was a broker or an investment bank. In fact, investment banks and brokers were among the earliest and most vocal of critics of HFT precisely because it took away the business model you just described. HFT reduces the bid/ask spread because it brings liquidity for whatever 1 and 2 are buying in from other sources besides just persons 1 and 2. That's why the investment bankers and brokers hate it. It cuts them out!

Maybe you think the best thing to do is hook up 1 and 2 directly so they can make their own deals? Welcome to the unregulated dark pools! Maybe person 1 is Anonymous Coward from slashdot, and person 2 is George Soros. Yeah, I wonder who is coming out on top in that transaction.

It is remarkable. You got it exactly backwards even after a very reasonable account of bid/ask spread was given above.

Re:Screw The Big Traders

[Hatta]

It reduces bid/ask spreads and thus lowers the costs associated with making trades

You cannot extract money from a system and simultaneously lower costs. All the money an HFT guy makes would have ended up in someone elses pocket if he didn't get there first.

They buy low, use a propietary knowledge base to estimate fair value, factor in business costs, assume risk that items won't sell at an expected price, and try to turn a profit. I may not know where to find a velvet black-light poster of Elvis

You don't know where to find that black velvet Elvis, but everyone knows where to find stocks. That's what exchanges are for.

Re:Screw The Big Traders

[wienerschnizzel]

The upshot: "Based on the vast majority of the empirical work to date, HFT and automated,competing trading venues have substantially improved market liquidity and reduced trading costs for all investors. Share prices are almost surely higher as a result of this reduction in trading costs, benefiting long-term investors. Higher share prices also have favorable implications for firms\ cost of equity capital. "

You are mixing apples and oranges here. Automated trading and HFT are not the same thing. Automated trading does provide substantially improved liquidity and reduced trading cost. HFT on the other hand does not demonstrably reduce trading costs (or at best the jury is still out on that) and the liquidity it provides means your transaction can go through in a fraction of a second rather than in one second. It provides no liquidity when the market is under stress as the HFT machines are plugged out immediately in non-standard situations. On the other hand, HFT takes a lot of capital out of the market for that 'service'. Is that fraction of a second of additional liquidity worh it? IMHO not.

There is so much FUD around HFT it is hard for people to think rationally about it. I had wasted the following study on a troll once already earlier this morning and therefore it would be a shame not to repost it: http://online.wsj.com/public/resources/documents/HFT0324.pdf [wsj.com]

That article is funded by Citadel LLC that owns a HFT platform. It provides no hypothesis, no metrics, no tangible goals. It's pretty much an essay reiterating a couple dozen pro HFT papers and press pieces

Maybe you could educate yourself as well and listen to some other opinions - like that of one of the fathers of automated trading.

HFT

[girlintraining]

HFT isn't a system stability problem as much as it is an access problem. What it does is increase the cost of entry into the market -- those who don't engage in HFT wind up paying for those who do, and so it winds up penalizing people with smaller portfolios and shifting the costs of it onto them. What you need to understand about profit is that it is always at the expense of someone else. And HFT is the sublime example of how to nickle and dime the less fortunate to death. These fractions of a penny here and there add up because it gets compounded by interest rate. Over time, the spread between those who have it and those who don't will grow; As is the trend in any investment-based system.

Re:HFT

[moosehooey]

I have heard the argument that the HF traders are actually taking money from the exchanges, rather than the other traders (because they reduce buy/sell price spreads, it's actually beneficial for the traders). That is why they've gotten so much publicity (because the exchanges have big lobbying budgets). There are other things which hurt the average trader a lot more than HFT but they're mostly unknown.

Re:HFT

[moosehooey]

Things like 1% management fees and high expense ratios on 401(K)s (which can end up costing you 3/4 of your retirement money), combination life insurance/savings plans (almost always a ripoff), and more specific to day-traders, things like how the AP sells early access to hedge funds, insider trading, that type of thing. I would argue that even the ads on CNBC trying to convince people that they can make money day-trading qualify as a scam. Also, see this video:

http://finance.yahoo.com/blogs/daily-ticker/yes-markets-rigged-survive-shark-infested-waters-143233110.html

Sometimes I think *de*regulation is the answer

[ron_ivi]

People keep saying that HFT needs to be regulated to avoid crazy spikes and crashes due to algorithms with stupid positive feedback loops.

I think the opposite would actually work better.

If the official rules stated "HFT is totally *un*regulated --- feel free to run your buggies, most insane, glitchy, and flawed HFT software" --- immediately all the other HFT software systems would be coded to watch for crazy non-justified buying&selling.

With all this regulation, if one bank's trading software starts going insane, the other banks start following them (and creat a positive feedback loop) under the assumption that in such a regulated industry the insane software must know something. If it were further de-regulated, the other software would assume the other software was poorly coded, and basically LOL at the bugs and profit from it until someone pulled the plug on the bad algorithm. And with that risk - I imagine a *lot* of interested would be in automating such plug-pulling checks so they happen in a very small number of miliseconds so the market can't crash too far before the kill switch hits.

Re:Sometimes I think *de*regulation is the answer

[girlintraining]

If the official rules stated "HFT is totally *un*regulated --- feel free to run your buggies, most insane, glitchy, and flawed HFT software" --- immediately all the other HFT software systems would be coded to watch for crazy non-justified buying&selling.

I love magical thinking like this. It keeps me employed. In other news, "too big to fail." Businesses don't pay for their mistakes: You do. That's the reason for regulation... it's to assure a baseline level of sanity... so when they screwup, they don't do it so badly that they take the rest of us with them.

Re:Sometimes I think *de*regulation is the answer

[ShanghaiBill]

People keep saying that HFT needs to be regulated to avoid crazy spikes and crashes due to algorithms with stupid positive feedback loops.

There is no evidence that HFT causes spikes and crashes. Actual evidence says the opposite: by increasing liquidity, HFT reduces volatility. HFT was initially blamed for the "flash crash" in 2010, but when the investigation was complete, it was found that most HFTers had pulled out of the market during the crash, and HFT played no role in causing or exacerbating the crash. In fact, the crash would have been less severe if HFTers had better models which would have allowed them to stay active during the crash.

Re:Sometimes I think *de*regulation is the answer

[Too Much Noise]

There is no evidence that HFT causes spikes and crashes. Actual evidence says the opposite: by increasing liquidity, HFT reduces volatility.

Actual evidence from the guys who monitor these kind of things says nothing of the sort. I wish people would stop spouting this line about HFT and liquidity. Here is a relatively recent GOOG flash crash (April 22 2013) likely due to HFT (based on timespan and number of trades, number of orders placed per trade and number of exchanges involved).

Re:Sometimes I think *de*regulation is the answer

[girlintraining]

There is an example of a purely unregulated market; EVE Online.

I play EVE. It's not a "very stable market". Goonsquad decided to attack miners in highsec. Mining is one of the main ways raw materials are generated for product generation, and when they did that, key resources to fuel starbases (oxygen isotopes, etc.) shot up massively in price. It would be the realworld equivalent of bombing oil pipelines and refineries.

As you get farther away from the main trade hubs and out into nullsec, prices can easily triple for commodities. And many alliances have policies to prevent anyone else from getting in on their lucrative cartels of freighter transports bringing needed supplies out.

But within EVE Online everyone is a professional trader, not some dude/mom/dad who just gambles some money on the stock market from behind his PC like it happens in the real world.

Like hell they are. Most people avoid serious trading because of the lack of easy access to information on sales volumes, pricing, etc, market volatility, and (unlike the real world) getting your products to one of the main trade hubs is risky. If blowing your ship to hell is cheaper than the cost of losing their ships to the police (concord), they'll blow it up. There's no jail in Eve -- in 15 minutes you're just like every other pilot again... and they'll loot your wreck and be on their merry.

I suggest that everyone plays EVE Online so that people learn about markets, about logistics, about profit per hour (just profit is for noobs).

And I'd suggest they play it to understand why government regulation and military protection of traders and merchants leads to vastly lower costs to society, and to see first hand how far the effects of market manipulation can travel.

And you're leaving out another critical component of Eve that isn't at all like the realworld: You're never sure who you're trading with. Identities can be traded, and because of this, and the interface mechanics, you can be buying supplies from your enemies one day, and selling arms to them the next.

And all of this "free market" love makes people incredibly distrustful, very manipulative, and economic power equates directly with military power. And what's more interesting... the distribution of wealth looks pretty much like it does in the United States: 1% controls over half the total wealth in the game... and that 1% can be very petty, self-centered, and short-sighted. Kings and kingdoms alike are created and destroyed every day -- there is no stability. In nullsec, you always have an exit strategy... a way to burn your assets and get out quick, because if the enemy doesn't fuck you over, your would-be kings claiming to be on your side will.

Eve is the wild-wild west, seen through the lens of a hundred spreadsheets. When it's a game, this can be fun. When it's real life... do you really want to go to bed one night and wake up the next with your house on fire and your neighbors looting each other, you, and everything else as the next Great New Power rolls in? Because this is a frequent occurrance in the game.

Oz is such a contradiction

[ThatsNotPudding]

Austrailia has a world-wide reputation of being laid-back, easy going, and - sometimes - incredibly rational (real gun laws in response to mass killings).

But on the other hand, they keep electing right-wing governments more than willing to be trained poodles for US corporate and foreign policy.

The very premise is suspect

[dbIII]

The details don't matter when the entire point is to be a man in the middle attack.