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High Frequency Trading and Finance's Race To Irrelevance
hype7 (239530) writes 'The Harvard Business Review is running a fascinating article on how finance is increasingly abstracting itself — and the gains it makes — away from the creation of value in the real world, and how High Frequency Trading is the most extreme version of this phenomenon yet. From the article: "High frequency trading is a different phenomenon from the increasing focus on short term returns by human investors. But they're borne from a similar mindset: one in which financial returns are the priority, independent of whether they're associated with something innovative or useful in the real world. What Lewis's book demonstrated to me isn't just how "bad" HFTs are per se, but rather, what happens when finance keeps walking down the path it seems to be set on — a path that involves abstracting itself from the creation of real-world value. The final destination? It will enter a world entirely of its own — a world in which it is fighting to capture value that is completely independent of whether any is created in the first place."'
So it'll be like any other virtual world computer game (and with its currency being of similar value, which is to say, not all that much).
Dutch tulip panic in the 1700's... hell, even better example: Neil Stephenson's "System of the World" series, showed what happens when financial systems render themselves obsolete. The world moves on and financiers quickly explore new avenues, leaving the old behind. The section describing Eliza and how she made a living in Amsterdam trading percentages of non-binding stock shares is a great tutorial.
Here's to hot beer, cold women, and Glaswegian kisses for all.
So companies shuffle stocks back and forth millions of times a day and we wonder NOW what the actual productive value is?? The whole dam stock market is based upon "confidence" aka a house of cards. As I like to say "Main St. built America, Wall St. destroyed it."
There was a good reason that companies were initially prohibited from owning other companies. Greed knows no limit.
This topic has been covered before in the documentary "The Corporation"
http://hellocoolworld.com/file...
2. Birth
How the corporation came to be. Originally, corporations were set up to serve the public
good. Corporation lawyers gained rights through the US Supreme Court using the 14th
Amendment (set up to protect slaves) that gives them the rights of a person. In the last
century, the corporation is given more and more rights while people are increasingly
stripped of theirs.
3. A Legal "Person"
Having acquired rights of immortal persons, what kind of person is the corporation? By
law, the corporation can only consider the interests of their shareholders. It is legally
bound to put its bottom line before everything else, even the public good
6. The Pathology of Commerce
If we look at the corporation as a legal person, it exhibits all the characteristics of a
psychopath using a personality diagnostic checklist by the World Health Organization.
If you have the time (and if you're at work, of course you have the time!), I recommend The Great Hargeisa Goat Bubble. One guy gets his last goat killed by an aircraft so he can claim twice its value from the airport, and it all goes wrong from there.
Errr.
Most stocks are held long term by long term investors. A example, as you suggest, are pension funds.
Most trading is done by short term holders – like HFT.
This is why in a single year more stocks of a company can trade than have been issued (suggesting huge turnover) yet the majority long term holders barely budge.
Of course the stock market is divorced from the real world. It's its own bubble, a game played by the upper 5% to enrich themselves and fuck everyone else. They don't care as long as they get their bonus.
You really think a hedge fund manager gives a crap about real-world value? The dude is making $15 million a year shuffling stocks around and skimming right off the top of everyone. He can buy a Ferrari every other week. That's your 'real world value' right there.
The elite don't care. They have burned up America, and were well paid by the taxpayers to do it. Now they are strip-mining what's left and when the country is a empty husk, ready to collapse into a third-world nation, they will get in their private jets, and fly off to their private, gated, guarded compound in Costa Rica or Belize, and live off the interest in their Bermuda bank accounts for the next 12 or 20 generations.
If telephones are outlawed, then only outlaws will have telephones.
by volume about half the trading is done by the large long term funds or corporations buying their own stock. the other half by hedge funds. on large volume days most volume is long term funds as they buy up or dump large amounts of stock.
a lot of the short term traders put money into the market. if you cash out part of your pension or other investments, someone has to buy that stock to give you the cash
After a public offering of new shares, what value does the stock market really add for that company? Sure, there are some things it helps with such as an approximate value that can be used for acquisitions, but once a company offers a set of shares on the market and collects the money from the buyer, those shares are essentially chips with the corporate logo to be bought and sold among gamblers in the world's biggest casino. At that point, those shares do little to create actual value in the real world.
The way I see it, you can eliminate the advantages of HFT while keeping the markets highly responsive by imposing a "clocking" scheme on exchanges. When an order is received by an exchange, it is not executed immediately but stored in a queue to wait for the next clock tick. When that comes, the order queue is shuffled into random order and then executed sequentially. Make the clock ticks wait a random period between 40ms and 50ms and any timing advantage of HFT or geography is nullified. The exchanges are still highly responsive; they just do randomized batch processing. All of the requests they receive in the previous clock period ought to be processed within the new clock period (with perhaps some occasional spill-over, in which case the new clock tick is stretched).
The HBR article notes two issues:
1. HF traders don't participate in stockholder meetings and thus their trades are divorced from steering company direction.
2. CEOs are focused on next quarter profits and, aside from a few corporate founder CEOs, are not able to have their company innovate.
The first problem is not specific to HFT. Even buy-and-hold mom and pop cannot influence a stockholder meeting because they don't own enough shares to meaningfully do so. The exception proves the rule: a bunch of Palestinian human rights defenders got together, bought some Caterpillar stock, and got a human rights issue on the agenda. Even with all that effort, the measure did not pass. And it was a large effort in coordinating. Individual stockholders usually do not organize, coordinate and campaign. (The "transaction cost" is too high.)
The second problem is caused by SEC, SOX and CEO compensation structure, not by HFT. The HBR article suggests without actually accusing that HFT is the cause.
HFT serves little purpose other than providing market liquidity (and even at that arguably harms it given the flash crash), but it's not to blame for the above two pre-existing problems of today's markets of publicly traded companies.
HFT is an example of rent seeking - where somebody is able to shave some of the economic profit from an activity without doing much of anything. In the HFT case, the US Congress put in a trading rule that caused a little bit of inefficacies in the market and HFT trading ruthless exploits that imposed inefficacies. Those inefficacies will never amount to a fraction a penny per share, but do it millions of times a day..
Think of it as a 160m dollar a day tax on investors. (the number comes from Lewis's book.)
See the historical Robber Barons as an example of rent seaking.
http://en.wikipedia.org/wiki/R...
arbitrage === extremely good. Keeps markets liquid. but it only requires a response time of seconds to minutes to be useful. high frequency trading is pure parasitism and should be abolished. Delays in order would remove a lot of it. Random delays in orders would be slightly more effective. And a trading tax would remove the low margin high volume trading. I have no idea why they don't implement this as see what happens. Could always unwind it if something unforseen results.
Some drink at the fountain of knowledge. Others just gargle.
The facts are otherwise. Based on estimates at a talk I was at recently - see the latter part of this (pdf) http://www.orie.cornell.edu/en... - traditional asset management comprises about 20% of trading volume; HFT accounts for over 30% and hedge funds for more than 25%. There may be some HFT done at hedge funds as well, but it's clear that the tail is wagging the dog.
Corporations have more rights than people, when was the last time you saw a corporation sent to jail? even for causing someones death, you kill someone even though manslaughter you are going to jail, if you steal you will probably go to jail. if a corporation does it, they get a fine, which relative to their income is minor.
Which is why you always do it running a mutual fund. Dangle other peoples' testicles instead.
I can only speculate that at some point regular sellers and buyers will 'take their business elsewhere' because the parasitism of HFT and it's successors reaches the point that NOT using the standard markets is more cost effective.
They can't. HFTs are in the only market there is. The "Victims" are only losing fractions of pennies per trade, so no ones in an uproar. It will take an act of congress to fix this and they're bought and paid for by the HFT's.
it allowed the high frequency traders to peek at the ballots others were sending in to the newspaper before they arrived, in turn giving them the ability to cast their votes using information not yet available to the rest of the market.
Front running is not High Frequency Trading. The existence of front running is not an argument to limit "High Frequency Trading" any more than phishing is an argument to end high speed internet.
Until people can recognize the difference between front running (a biased ordering of particular market events) and high frequency trading (low latency response to available market data) then there really is no point in responding to this nonsense. Not as much fun as donning the tinfoil hat, I know...
We have been for a long time in the situation where the financial institutions are primarily extracting rents from producers rather that contributing to economic productivity. High frequency trading is simply a particularly obvious example of this. The situation is not particularly new. Those with wealth and power have always influenced the rules to their own benefit. The question is whether there are any counter-measures that effectively push people to contribute value rather than skim off value created by others.
Recently, I have started wondering: would it be advantageous for the stability of our economy and financial markets if there was a minimum holding time for shares, options, etc.? For example one day? That would make high frequency trading, which I agree is not really productive to the general economy, disappear. I don't think a rule like that would hinder real investors, because as you say, they hold for a longer time anyway. But it would stop speculators trying to squeeze some money by day trading without contributing anything to the economy.
Your made up and arbitrary rules will clearly solve a problem which you have not adequately described.
The main thrust of the book "Flash Boys" is that the HFTs get advance notice of your trade on one exchange, and then beat you to all the other exchanges to do the trade before you. This is not normal "first come first served", but rather a form of front-running.
Because I understand how markets work. Thin markets suck. Large bid-ask gaps suck. Losing 20% of your investment because you made a typo, and you take a 20% hit just between the best price you can buy for and the best price you can sell for sucks.
Let the casino gamblers provide liquidity, and rob each other. It doesn't actually cost us anything - in fact, competition between market makers (which is one thing HFT is used for) saves me a non-trivial amount in my once-per-quarter trading. It's much nicer now than even 10 years ago.
Socialism: a lie told by totalitarians and believed by fools.
From the book "Flash Boys", one of the HFT companies mentioned that they were only ever "down" one day in five years. That's not actually taking risk. That's skimming a more-or-less guaranteed tax off the top.
I agree mostly with this article, but I have one comment on something said in the final paragraph: "But they're borne from a similar mindset: one in which financial returns are the priority, independent of whether they're associated with something innovative or useful in the real world." The main point of businesses is, and always has been and always will be, to make money. They're producing something people want or need only because that is the way to get money. Otherwise, it would be a governmental subsidy or a charity, rather than a company. I think, instead, the actual dichotomy is between short term and long term gains. The examples the author gives of CEOs that have been successful by resisting the pressure from the financial markets are of companies that did make money, lots of it. There is an interesting article by investor J. Kennon that summarizes it as impatience robbing speculators of much higher gains they could have earned by investing in the long run. So, I think it is more a problem of speculators trying to get rich quickly; investors trying to become rich, in itself, is not so problematic.
By your idiotic drivel, hammers have more rights than people too. After all, when's the last time you saw a hammer sent to jail? (incidentally, this argument is chock full of irony since there probably have been hammers and corporations effectively "sent" to "jail" in the US - see below) The fundamental problem here is that corporations don't actually commit crimes any more than any other sort of property commits crimes.
Now, I realize that the US legal system is rather dumb in this regard and actually have sent a variety of household items and assets to jail (here, seized in an illegal drug-related raid and auctioned off by the US Marshals or similar organizations) on the basis that the thing in question did commit a crime or was at least used in the commission of a crime.
The legal fiction of corporate personhood is to protect the rights of the people involved in the corporation. In the Citizens United case, the only reason why people care about corporate personhood in the first place, the McCain-Feingold campaign finance law gave unaffiliated individuals special, unconstitutional privileges over those associated with a corporation. That's why the law was repealed.
The creation of FPGA's to sit directly on the fiber leaving the stock exchanges has utterly corrupted high frequency trading. _No one_ in their remote office can get equal notice of small changes, and those FPGA's can flip transactions repeatedly as a stock rises to its new level, buying and selling and buying and selling to everyone else, and pulling their profits out of what normal traders would see. The transaction cost is much too low, and the forgiveness time to recall an unwise transaction is much too generous.
Unfortunately, there are also inevitable phase delays and feedback loops in such systems that can destroy the value of companies, and investors, who get caught in the unplanned positive feedback. They can't be "programmed against" because programming against them would slow the transactions and lose the very profit that HFT is reaping.
I've thought about your "solution" for all of 12 seconds and already I'm buying up stocks on a daily basis so that I can lease shares to people for as long as they would like to hold them.
Congratulations on creating another, more complicated financial product.
W..w..W - Willy Waterloo washes Warren Wiggins who is washing Waldo Woo.
Do hammers have agency? Would the sentence "A hammer builds a house" make sense? How about "Apple releases new iWhatever"? Or "US established a beachhead on D-Day"?
We think and treat corporations, nations and other institutions as living beings because they are. We treat hammers as inanimate objects because they are inert matter. Yes, a corporation requires a human to act on its behalf to do anything, but similarly you require your muscle and neural cells to act on yours, and they in turn rely on molecular machines. And the difference between the US and USSR was not that one was made of different kinds of people than the other, but rather about the structures and values and even more importantly what the structures and values embodied - the "national spirit", so to say.
The US legal system is no less fictitious than corporations are. Either they have existence and agency - effective personhood - or they don't. Which one is it?
Forget magic. Any technology distinguishable from divine power is insufficiently advanced.
The "value" of stock is by no means connected to real world revenue of the issuing corporations anymore. It's just dependent on expectations of stock traders and whether or not they have any "faith" in the paper.
So, essentially, it's not really that different from any other religion. It's lost its roots in reality long, long ago, not just since the advent of HFT. If any doubt existed, the dot.com bubble with overhyped "values" of stock of companies that never earned a single dime should've dispelled that assumption that stock value has anything to do with the real world well over a decade ago.
We used to have a Bill of Rights. Now, with the rights gone, all we have left is the bill.
This might be a surprise to you, but it has already happened. The growth in dark pools is directly attributable to major investment managers exiting the public markets and doing their trading in the pools in order to avoid the HFTs and other shenanigans (both real and imagined). The public exchanges have lost a huge amount of business over the last few years... hoist by their own petard, so to speak. At least to a degree.
Insofar as regular investors go, HFT doesn't really have much of an effect so there's no reason to take our business elsewhere. Losing a penny here and there, when it happens at all, is nothing compared to what trading cost us even 10 years ago. Our trades are simply too small for the HFTs to be able to act on.
But if you are really worried, just use limit orders that are slightly outside the bid/ask range (i.e. so they don't fill instantly) and wait for the fill. Nobody can front-run a small order so making it public beforehand prevents the HFTs from being able to do anything with it. You have to be a bit patient, but that's all. (this advise does not apply to thinly-traded names, only to liquid names).
-Matt
Bitcoin to me...
Because I understand how markets work. Thin markets suck. Large bid-ask gaps suck. Losing 20% of your investment because you made a typo, and you take a 20% hit just between the best price you can buy for and the best price you can sell for sucks.
Oh my fucking god. You're seriously saying that the system I described in a couple lines couldn't possibly have a fail-safe mechanism for people who make a typo and purchase the wrong stock. Open your mind a little more.
I don't care if you hate my plan, and you certainly have more experience in the market itself. But don't bring up issues like "typos" if you expect to be taken seriously.
Let the casino gamblers provide liquidity, and rob each other. It doesn't actually cost us anything - in fact, competition between market makers (which is one thing HFT is used for) saves me a non-trivial amount in my once-per-quarter trading. It's much nicer now than even 10 years ago.
This is actually a good argument. Lead with this in future discussions with others, and forget about frickin typos.
I don't have an investment portfolio. The 401k I had at one time got cashed out a while ago. So, are the HFTs saving me money, or making my expenses go up? If they aren't saving me money, and are contributing to higher prices, I have the right to say put a limit on them. Or, if I don't have the right to limit them, what is the SEC for?
Anyhow, thanks for the responses.
If you think I voted for Trump because of this post, you're wrong. I voted for Dr. Jill Stein of the Green Party. Again.
Those are the OTC and pink markets.
"Secondary markets" and "OTC" don't mean what you think they mean - Specifically, "OTC" doesn't mean "Pink Sheets". I suspect you've confused OTC for OTCBB. Both the NASDAQ and the NYSE count as secondary markets, and everything on the NASDAQ also counts as OTC, which really just means a "dealer" marker (which in turn has nothing to do with "dealers" as you might understand it, it just means direct sales between buyers and sellers, rather than an agent-mediated auction style market like the NYSE).
That said, I would have to say that the markets as a whole have become about as stable as the classic "pink sheets" markets. Prices have completely decoupled from reality, when a car bomb in Kabul can send the entire market down by over a percent, or an unusually clear message from Janet Y can send it on a three day rally. Companies don't make and lose (as an aggregate) hundreds of billions of dollars over the course of an hour, no matter what the markets say.
As for TFA's comment about dividend stocks... Yeah, they count as a pretty decent safe-haven in a bear market; but overall, they have a piss-poor return - Three to four percent sustained, at best. Beats (core) inflation, but not by much... Certainly not enough to retire on unless you literally sock away half of your paycheck for the next 40 years.
We appear unwaveringly headed for a securities market implosion, and not merely of the recession/depression kind, but something much, much worse.
it is costing us tons. it is preventing economic recovery right now.
Businesses are dumping money into the stock market as it is growing by 20-30% annually while the "real economy" is stuck making 1%.
If those businesses were forced to invest in new products and growth instead of in the fake stock market we could get out of this mess easier.
the majority of companies are sitting on trillions of dollars worth of cash. it is just sitting there collecting dust. why aren't they investing it in the future of their company?
i thought once I was found, but it was only a dream.
The most effective solution to overpopulation seems to be raising the standard and security of living. The developed world has basically no population growth. As other places get economically developed, their population stops growing. Make people economically secure, arrange things so almost all babies have long lives, provide methods of having sex that don't lead to reproduction, and watch population growth stop. Technological advancement makes it possible to do this with more and more populations.
"When you have eliminated the unacceptable, whatever is left, however improbable, must be the truthiness" - Holmes