Please teach me what purpose HFT serves to our economy.
The best analogy I've heard is to transportation / shipping. Back when such transport was new, people scoffed at the idea of making money for moving things around. "You aren't producing anything, making anything, it's a complete waste." But today, we can see how moving goods around is actually of extreme importance.
Trading moves another kind of economic good--capital. That is, trading is to capital as transportation is to physical goods.
High-frequency trading is just trading... but faster. You'll notice how the summary mentioned New York and London. This is because the HFTs are arbitraging between those two major exchanges. If they were slower, you'd have more people getting "incorrect" prices, in the sense that there was a better price in NY but the information hadn't been priced into the London exchange yet. Hence, London traders would be getting screwed out of better deals that they technically could have known about.
However, HFT has also become associated with a bunch of "dirty tricks", like flash trading, etc. These kinds of things actually CAN hurt investors and other traders. This gives HFT as a whole a bad name, as it is viewed negatively by those who feel they are taken advantage of by these tricks.
In general, though, HFT has lowered market spreads, meaning it costs less to trade. Those lower costs show up in investors' bottom lines, which obviously include retirement accounts, so a lot of people are helped by HFT. However, I think a lot of people believe that without HFT, money would simply not be "leeched out", because they view traders as middlemen who are price gouging. The problem with this view is that all trading requires either paying middlemen, paying the spread, or taking on risk like traders do. So, take out the middlemen and you'll just pay higher spreads or incur larger risks, both of which are real costs, economically-speaking.
Another thing is that if you check the trading volumes, you'll see that HFT makes up a substantial (50+%) of trading volume. People I've talked to often think this equates to 50% of the "profit" leeched by HFT. This is not so at all... the reason they have such high volumes is they'll buy and sell multiple things simultaneously, then trade back to a fully-hedged position moments later or at least by the end of the trading day. As an HFTer you might buy 100,000 contracts and sell them a bit later and net just $5-10 for the whole thing. Of course, there might be thousands of such opportunities in a given trading day, if you're a large firm with a competitive HFT program. As such, this type of trading incurs a very high volume-to-profit ratio. On top of that, a substantial portion of their would-be profits are eaten up by trading fees. And then, as the summary mentions, you've got substantial electricity costs, top-end hardware costs, collocation costs (which can be obscenely expensive for the prime real estate locations), etc., so it's not at all like HFT is making money hand over fist.
HFT was a big thing a few years ago because it was a new thing, there wasn't much competition, and the profits were fierce. Now it's just the competition that is fierce.
Score 3? I have to wonder who actually modded up a post which, in two sentences:
(a) attributes malicious intentions to its opponents,
(b) calls them names, demonstrating the level of maturity of a small child,
(c) asserts opponents' spitefulness while simultaneously engaging in spite itself,
(d) fails to present even a single shred of evidence for any of the above.
they see your incoming stock- buy the stock cheaper- and then sell it to you at a markup
They cannot see your incoming market order before it actually executes. They can see your incoming limit order when you put it up, just like anyone else with access to level 2 market data. But your limit order is just an offer, not a demand to buy/sell at the currently available prices.
With a limit order, all they can do is outbid you. That's completely legal; it is not front-running. It is no different than someone outbidding you in an auction.
Front-running is when you, as a stock investor, want to buy a stock, and your broker buys some of the stock first, then buys some for you. Buying the stock increases the price as the lowest offers are removed. Since your broker bought first, you're getting a worse price on your stuff. Then the broker turns around and sells the stuff he bought at the new, higher price. This is fraudulent and illegal.
As I said, it's ILLEGAL when humans do this.
It's illegal for anyone to do this, robot or human.
I disagree with cancelling trades for algos when they screw up. If they buy a stock for too high or sell a stock for too low, they should have to eat it.
If you pay a higher commission for market taking than for market making, it's either the exchange charging you, or your broker. If it's the exchange, then the market makers can afford to give you better bids/offers in compensation for the smaller fee they have to pay. If it's your broker, get a better broker. They shouldn't be doing that.
As for the slightly worse price, you're absolutely right. Many are willing to pay that spread because it is so small these days. The enhanced competition forces those prices to not be much worse than making your own offer, but there's only so much risk the other market participants are willing to take on at any one time.
They can see what order you have placed before it is fulfilled.
Have you not heard of level 2 market data.
Combine that with super high speed connections to the exchange and you can see transactions at the millisecond and act on them.
This is highly misleading. Level 2 market data is real-time offers to transact, not actual incoming transactions. GP was talking about knowing about what transactions are going to happen before they actually happen.
If you're worried about people adjusting their selling prices in response to your buy offer, you can always just buy at their prices immediately, rather than putting up an offer for a bit less.
before a buyer and a seller can meet to make a trade they both need to signal that they have the intention to do so.
True, but any electronic securities exchange won't tell anyone you've put in an order to buy or sell at an available market price until it actually executes your order. Doing otherwise would be highly fraudulent. Therefore, a bot can't tell unless it has some predictive capabilities... more likely probability and statistics than ESP, realistically speaking, but using probability carries with it the risk that it'll be wrong.
Just reading the/. blurb should be enough to convince anyone that "robot trading" is a parasitic activity that should be taxed to oblivion
Just from that, huh? So we should just take everything "a researcher at the University of Miami" says as gospel? If the researcher had said trading robots are cute, pink, fluffy creatures that play nicely with the unicorns, you'd be arguing we should be throwing money at them.
That's nonsense. You should always make an effort to hear the other side before coming to a conclusion. Why was this modded up?
I guess you stopped there, not deigning to read the very next sentence, which was intended to address your concerns. For reference:
If you also had some tort reform such as loser pays + claimants can receive third-party funding for their cases, such claimants could actually win judgments in court, rather than settling out of court for a measly $2k or simply being out-funded into oblivion.
The point being, if such claimants could win, it wouldn't be profitable for corporations to engage in that kind of behavior.
That said, the objective of my post was to explain in very general terms the argument made by the other side, not to provide excruciating detail, defend it against all counterarguments (and you do hint at one I think is good, namely Big Security), nor even to persuade anyone. Why? Because without informed responses that address points people are actually making, we're left with only political potshots like this:
Sounds to me like you've thought this through about as much as the average libertarian.
... which, while I understand is satisfying, add nothing of value to the debate. Just look at how many comments in this thread amount to "libertarians are stupid" or "liberals are stupid". And they're modded up, too! It's silly.
The problem is that Libertarians want corporations to be unencumbered by regulations to the extent that they can harm people and the environment without oversight.
Nonsense. Nobody, whether Republican, Democrat, Libertarian, Green, Socialist, whatever, wants individuals to be able to freely harm others.
Libertarians and Republicans frequently call for less regulation. I'm neither, but I still believe I can explain the argument they're making: they don't want complete deregulation, they just want less of a monopoly on regulation. Government regulation is a monopoly on regulation, and regulatory monopolies lead to regulatory capture (basically, corruption), as we've seen all over the US. Private regulation, on the other hand, means something like having insurance companies "internalize the externalities". If you just now took "private regulation" to mean companies voluntarily regulating themselves without any monetary incentive to do so, I agree, it sounds absurd. But that's not what it means.
The canonical example is pollution. The argument against free markets goes something like this: without regulation, companies will pollute the skies and dump toxic waste into rivers, since it is less costly than handling the waste. In other words, the market won't price in the externalities.
The counterargument: if companies did so, they would actually be hurting people--people who breathe pollution are more likely to get cancer, fishing businesses cannot catch uncontaminated fish, etc. These individuals would then have legal standing to sue in court, and have a really good case to boot. If you also had some tort reform such as loser pays + claimants can receive third-party funding for their cases, such claimants could actually win judgments in court, rather than settling out of court for a measly $2k or simply being out-funded into oblivion.
Under this system, companies would buy liability insurance to protect themselves against such large judgments, or else risk destroying their business entirely. (And who is going to invest in that?) As a condition for continued coverage, they would be required by their insurers to submit to regular audits and comply with certain safety and waste handling procedures, etc. If the company won't submit to these regulations, insurers just jack up the rates--it's riskier to insure them, after all. The audits and other compliance are cheaper by design, so companies will go that route.
This system provides a balance between the interests of the companies affected by the regulation, and the people who would be affected without it. Insurers don't want to impose onerous regulations lest the company choose a different, better insurer. But insurers don't want to do too little, else they're liable to be mispricing their insurance and end up losing a bunch of money. And corruption is gone, because there's no sense in letting a company you're insuring change your auditing procedures when you believe that's going to cost you money. Better yet, the regulations put in place are preventative rather than reactionary. While a monopolistic regulator motivated primarily by politics may simply react to events that have already occurred and put in place regulations to ensure they don't happen again, insurers actually have an incentive to imagine the worst-case scenarios and design policy to prevent them in the first place.
Would this work? You decide. But at least get your opponents' arguments straight, first. Otherwise we're never going to get anywhere.
I don't know about you, but where I live, there are constitutional laws imposing limits on government power, and so it cannot be said the government owns the entire country, and certainly not the lives of everyone in it.
The term frontrunning can be used to refer to the illegal practice of a broker placing his own order ahead of that of his customers', but it can also be used to refer to any practice which attempts to trade before another known trade, such as watching the trades in the market and determining, statistically speaking, when an index fund is re-weighting its positions, and buy/sell ahead of them on the stocks they haven't yet traded. The former is illegal, the latter (relying only on public information) is legal.
True arbitrage, say of the same asset between exchanges, does increase liquidity; I was unclear. I meant trading with non-equivalent (but similar) stocks; buying Coke when Pepsi goes up a fraction of a cent, and vice versa. Such a strategy can spread volatility from stock to stock. Alone, I would say it usually decreases volatility, but that it can also increase volatility as well, depending of course on what the other parts of the market (what it is arbitraging with or against) are doing. I believe the detractors primarily focus on the volatility increases, and the supporters primarily focus on the volatility decreases. *shrug*
Thanks for the informed reply. I'm aware that the crash you mentioned and the crash I mentioned are not one and the same. The link you gave provided little insight into its cause. Do you have any more information about it? The crash I mentioned wasn't due to a fat-finger trade either, just a really large trade placed as a hedge, but done in a time of low liquidity.
As for what I would consider HFT: it is a bit of a grey area and hard to draw a precise line, for which I'm sure you'll forgive me, but as I see it, it is entirely independent of the "why" the trades are being made, just the timing, and is a bit of a relative thing: how fast a trade is turned around, how new the information must be to act on it, and so on, somewhat relative to what everybody else is or had been doing. Things like holding a stock for 10 seconds before selling it, getting your orders in before anybody else, and so on, and doing this regularly and as part of a business model--these things I'd call HFT.
My focus is on the underlying mechanisms the trader/algorithm uses, not any kind of official designation or requirements. Automated market making would therefore in my opinion fall under this category, for most liquid assets. (For less liquid assets, trades are likely slower, so it'd be something I wouldn't consider high-frequency.) Officially designated market makers, under this perspective, are simply HFTers employed with a specific algorithm (make trades at the quoted prices) and specific requirements (always stay in the market / provide a minimum amount of liquidity at all times). In exchange for these requirements, they may get certain benefits such as liquidity rebates or better information.
I would like to point out that much of the debate as to whether HFT increases or decreases volatility hinges upon what exactly you consider to be HFT. If you take market makers and arbitratrageurs out of your definition, if you even can (you pointed out the difficulty here), I believe most of what is left is going to be those increasing volatility. And then you could say HFT increases volatility, or removes liquidity. But doing that seems a bit arbitrary to me. If you look at it from this perspective, I think you can understand why people make the claim that HFT reduces volatility or adds liquidity. How would you define the line and why would you put it there?
"Converting in to cash" means this: let's say I want to sell 1 share of GOOG. GOOG is trading at 900-ish right now. So I'd get about $900. Great.
But now let's say I want to sell a billion shares of GOOG. Every sale needs a buyer. Am I going to be able to find enough buyers willing to buy a billion shares of GOOG *all* at $900? No, probably not. I'll get $900 for the first share, maybe even the first ten shares. But after I've exhaused the buyers at $900 I have to start selling at $899.9999 or so. And then $899.9990 maybe, on down the line. (Also, trick question: it's impossible, there are only 331.77M shares of GOOG anyway.:P)
This phenomenon is called "slippage" and represents a lack of liquidity: it is harder to convert your assets into cash if doing so causes the price to drop as you're selling. If my first shares are sold at $900 and the last are 2% lower, then I'll probably have a slippage of about 1% on my sale, taken as a whole. GOOG is highly liquid, but nothing is going to be "perfectly liquid". When there is less liquidity, smaller traders can move the price more with their trades (by the very definition of liquidity). As such, the quoted price you see (which in the case of stocks is typically the price of the last trade) is often harder to predict or swings more (higher volatility).
But not all HFT is "adding liquidity" which is why there's a bit of a debate about whether HFT increases volatility or decreases it. The answer is that it depends on the kind of HFT.
I wouldn't say EVE is purely unregulated. First of all, the developers make conscious decisions about what prices they would like to see for certain things and what incomes should be obtained for various activities, and (try to) adjust the item creation and/or disposal mechanisms to direct the economy. There are also (unsubstantiated, AFAIK) claims that the developers use confiscated assets from banned players (botters, real-money traders) to adjust PLEX prices. And speaking of botters and RMTers: that's some regulation right there, moreso of botters than RMTers.
I think these activities by a central authority, taken to affect the market according to what they feel is good or to protect other players, are tantamount to regulation. That said, I certainly wouldn't call EVE as regulated as RL markets.
They don't take the rest of us with them. HFTers are often trading their own stock, or the stock of others who have already agreed to it; if HFTers make mistakes and lose it all, it's on them. I say if they make mistakes, let them fail. If they are trading neither their own stock nor the stock of others who have already agreed to it, they may be criminally liable for fraud (IANAL).
To be more explicit: If you own 10 shares of stock, it doesn't matter if there's a flash crash for a few minutes while people get their algorithms back in shape. You still have 10 shares of stock through the whole thing. You don't gain or lose *anything* unless you make a trade before the price returns to its sane level. Any changes in the value of your portfolio when you make no trades are known as "unrealized" gains/losses which represent the dollar-value you would have *if you were to make a trade at that time*. When you make a trade, you "realize" that gain or loss.
But I understand your concern: businesses do typically pass their costs on to their consumers, and I won't say there is no regulation needed. I believe what is needed is that it be very clear whether or not *your* shares are being traded without your explicit consent for every trade. Arguably, this is already the case, as investment banks are required to inform people of what they're investing in, and in this case, they may be investing less in stocks than in high-frequency trading algorithms. That should *not* happen unless the customer knowingly allows it.
- A quantification of the degree of uncertainty about the future price of a commodity, share, or other financial product
And wikipedia says:
- In finance, volatility is a measure for variation of price of a financial instrument over time.
As liquidity increases, we can trade more without affecting the price much (leading to lower volatility, whichever of the above definitions you like); as liquidity decreases, smaller traders can have a large impact on the price (leading to higher volatility, again whichever of the above definitions you like).
Of course, I think you'll agree that the first definition is more difficult to measure objectively. Perhaps through option prices. Also, liquidity providers can pull out of the market at any time, so just because there's liquidity now doesn't mean it's going to be there in a few weeks, days, or even hours.
The issue at hand causing the disagreement you're seeing is that really that there are actually multiple kinds of "HFT". HFT is just high-frequency trading, which in simplest form is just trading more quickly than we've been able to do before. Very much more quickly.
Some kinds of trading, including high-frequency trading, add liquidity; participants that do this are called market makers, and market makers reduce volatility by making it cost more to move the price. (In fact, it is mathematically impossible for a market maker to reduce liquidity, other than by pulling out of the market (i.e., stop trading), just by virtue of how their trading method works: through limit orders, rather than market orders) Market making has been done for years and years and years, and was in existence well before HFT came along. People doing this used to be called specialists.
Other kinds of trading often, but not always, take liquidity, and are therefore capable of adding volatility. Most hedge funds, mutual funds, index funds will use this kind of trading. When done in HFT, it usually amounts to all the "evil" things or "dirty little tricks" you hear about when you hear about the bad side of HFT: frontrunning, tiny statistical arbitrage between similar stocks, paying to get market information microseconds before others, etc. In other words, this is the kind of HFT that gives the whole thing a bad name.
(By the way, the big "flash crash" came during a time of low liquidity, where a lot of market makers had already pulled out because the market was stressing their algorithms too much. This led to the stress overloading more market makers, causing them to pull out as well. A classic cascading failure. A lot of the algorithms that stayed in the market were the arbitraging algorithms, which weren't sure whether they were making huge amounts of money or losing it, because the prices were all haywire.)
Lolwut? No, it's the opposite, *by definition*. See here:
liquidity
2. (economics, countable) An asset's property of being able to be sold without affecting its value; the degree to which it can be easily converted into cash.
What you need to understand about profit is that it is always at the expense of someone else.
I agree with most of the rest of what you said, but I can't agree here. Despite typically being measured with currency, profit is often subjective; in fact, that's why we trade in the first place: I want an apple more than I want the money you're charging for it, and you'd rather the money than the apple. When we complete our transaction, we both think we've gained.
Now if I turn around and sell that apple for twice what I paid for it, I'll have no apple and more money than I started with. That's certainly a more objective form of profit. But it still doesn't necessarily come at the expense of someone else! I could just be a retailer: as a business, I buy apples from people, cheap, but I aggregate (or deaggregate) them, hold them for a while, have to get rid of the ones that don't sell, to stick prices on them, to handle the credit card transactions, to do the advertising, buy the building and parking lot, etc. etc. But you're still willing to sell me that apple for "half price", because you don't want to have to deal with any of that stuff, and we're both okay with that. We *still* both benefit.
I'm not saying profit never comes at the expense of someone else, not at all. Theft is an obvious example. Even in a supposedly clear, negotiated trade it can happen: for instance, if you're unaware of the true value of what you're giving up (or getting)--this is called asymmetric information. In extreme cases, this can amount to fraud.
But to say profit is *always* at someone else's expense? Far from it.
Slashdot Mirror
The markets were liquid enough for me
And I suppose you are the only person to whom people should be catering...?
Please teach me what purpose HFT serves to our economy.
The best analogy I've heard is to transportation / shipping. Back when such transport was new, people scoffed at the idea of making money for moving things around. "You aren't producing anything, making anything, it's a complete waste." But today, we can see how moving goods around is actually of extreme importance.
Trading moves another kind of economic good--capital. That is, trading is to capital as transportation is to physical goods.
High-frequency trading is just trading... but faster. You'll notice how the summary mentioned New York and London. This is because the HFTs are arbitraging between those two major exchanges. If they were slower, you'd have more people getting "incorrect" prices, in the sense that there was a better price in NY but the information hadn't been priced into the London exchange yet. Hence, London traders would be getting screwed out of better deals that they technically could have known about.
However, HFT has also become associated with a bunch of "dirty tricks", like flash trading, etc. These kinds of things actually CAN hurt investors and other traders. This gives HFT as a whole a bad name, as it is viewed negatively by those who feel they are taken advantage of by these tricks.
In general, though, HFT has lowered market spreads, meaning it costs less to trade. Those lower costs show up in investors' bottom lines, which obviously include retirement accounts, so a lot of people are helped by HFT. However, I think a lot of people believe that without HFT, money would simply not be "leeched out", because they view traders as middlemen who are price gouging. The problem with this view is that all trading requires either paying middlemen, paying the spread, or taking on risk like traders do. So, take out the middlemen and you'll just pay higher spreads or incur larger risks, both of which are real costs, economically-speaking.
Another thing is that if you check the trading volumes, you'll see that HFT makes up a substantial (50+%) of trading volume. People I've talked to often think this equates to 50% of the "profit" leeched by HFT. This is not so at all... the reason they have such high volumes is they'll buy and sell multiple things simultaneously, then trade back to a fully-hedged position moments later or at least by the end of the trading day. As an HFTer you might buy 100,000 contracts and sell them a bit later and net just $5-10 for the whole thing. Of course, there might be thousands of such opportunities in a given trading day, if you're a large firm with a competitive HFT program. As such, this type of trading incurs a very high volume-to-profit ratio. On top of that, a substantial portion of their would-be profits are eaten up by trading fees. And then, as the summary mentions, you've got substantial electricity costs, top-end hardware costs, collocation costs (which can be obscenely expensive for the prime real estate locations), etc., so it's not at all like HFT is making money hand over fist.
HFT was a big thing a few years ago because it was a new thing, there wasn't much competition, and the profits were fierce. Now it's just the competition that is fierce.
Lavabit is still in court over this. You can contribute to their legal defense fund here.
Score 3? I have to wonder who actually modded up a post which, in two sentences:
(a) attributes malicious intentions to its opponents,
(b) calls them names, demonstrating the level of maturity of a small child,
(c) asserts opponents' spitefulness while simultaneously engaging in spite itself,
(d) fails to present even a single shred of evidence for any of the above.
Oh, wait. This is the internet. Carry on.
You could put out a bounty for making the web site viewable without JavaScript. :-)
No he can't. He doesn't have JavaScript enabled.
they see your incoming stock- buy the stock cheaper- and then sell it to you at a markup
They cannot see your incoming market order before it actually executes. They can see your incoming limit order when you put it up, just like anyone else with access to level 2 market data. But your limit order is just an offer, not a demand to buy/sell at the currently available prices.
With a limit order, all they can do is outbid you. That's completely legal; it is not front-running. It is no different than someone outbidding you in an auction.
Front-running is when you, as a stock investor, want to buy a stock, and your broker buys some of the stock first, then buys some for you. Buying the stock increases the price as the lowest offers are removed. Since your broker bought first, you're getting a worse price on your stuff. Then the broker turns around and sells the stuff he bought at the new, higher price. This is fraudulent and illegal.
As I said, it's ILLEGAL when humans do this.
It's illegal for anyone to do this, robot or human.
I disagree with cancelling trades for algos when they screw up. If they buy a stock for too high or sell a stock for too low, they should have to eat it.
I completely agree.
If you pay a higher commission for market taking than for market making, it's either the exchange charging you, or your broker. If it's the exchange, then the market makers can afford to give you better bids/offers in compensation for the smaller fee they have to pay. If it's your broker, get a better broker. They shouldn't be doing that.
As for the slightly worse price, you're absolutely right. Many are willing to pay that spread because it is so small these days. The enhanced competition forces those prices to not be much worse than making your own offer, but there's only so much risk the other market participants are willing to take on at any one time.
They can see what order you have placed before it is fulfilled. Have you not heard of level 2 market data.
Combine that with super high speed connections to the exchange and you can see transactions at the millisecond and act on them.
This is highly misleading. Level 2 market data is real-time offers to transact, not actual incoming transactions. GP was talking about knowing about what transactions are going to happen before they actually happen.
If you're worried about people adjusting their selling prices in response to your buy offer, you can always just buy at their prices immediately, rather than putting up an offer for a bit less.
before a buyer and a seller can meet to make a trade they both need to signal that they have the intention to do so.
True, but any electronic securities exchange won't tell anyone you've put in an order to buy or sell at an available market price until it actually executes your order. Doing otherwise would be highly fraudulent. Therefore, a bot can't tell unless it has some predictive capabilities... more likely probability and statistics than ESP, realistically speaking, but using probability carries with it the risk that it'll be wrong.
Just reading the /. blurb should be enough to convince anyone that "robot trading" is a parasitic activity that should be taxed to oblivion
Just from that, huh? So we should just take everything "a researcher at the University of Miami" says as gospel? If the researcher had said trading robots are cute, pink, fluffy creatures that play nicely with the unicorns, you'd be arguing we should be throwing money at them.
That's nonsense. You should always make an effort to hear the other side before coming to a conclusion. Why was this modded up?
If you also had some tort reform such as loser pays + claimants can receive third-party funding for their cases, such claimants could actually win judgments in court, rather than settling out of court for a measly $2k or simply being out-funded into oblivion.
The point being, if such claimants could win, it wouldn't be profitable for corporations to engage in that kind of behavior.
That said, the objective of my post was to explain in very general terms the argument made by the other side, not to provide excruciating detail, defend it against all counterarguments (and you do hint at one I think is good, namely Big Security), nor even to persuade anyone. Why? Because without informed responses that address points people are actually making, we're left with only political potshots like this:
Sounds to me like you've thought this through about as much as the average libertarian.
... which, while I understand is satisfying, add nothing of value to the debate. Just look at how many comments in this thread amount to "libertarians are stupid" or "liberals are stupid". And they're modded up, too! It's silly.
The problem is that Libertarians want corporations to be unencumbered by regulations to the extent that they can harm people and the environment without oversight.
Nonsense. Nobody, whether Republican, Democrat, Libertarian, Green, Socialist, whatever, wants individuals to be able to freely harm others.
Libertarians and Republicans frequently call for less regulation. I'm neither, but I still believe I can explain the argument they're making: they don't want complete deregulation, they just want less of a monopoly on regulation. Government regulation is a monopoly on regulation, and regulatory monopolies lead to regulatory capture (basically, corruption), as we've seen all over the US. Private regulation, on the other hand, means something like having insurance companies "internalize the externalities". If you just now took "private regulation" to mean companies voluntarily regulating themselves without any monetary incentive to do so, I agree, it sounds absurd. But that's not what it means.
The canonical example is pollution. The argument against free markets goes something like this: without regulation, companies will pollute the skies and dump toxic waste into rivers, since it is less costly than handling the waste. In other words, the market won't price in the externalities.
The counterargument: if companies did so, they would actually be hurting people--people who breathe pollution are more likely to get cancer, fishing businesses cannot catch uncontaminated fish, etc. These individuals would then have legal standing to sue in court, and have a really good case to boot. If you also had some tort reform such as loser pays + claimants can receive third-party funding for their cases, such claimants could actually win judgments in court, rather than settling out of court for a measly $2k or simply being out-funded into oblivion.
Under this system, companies would buy liability insurance to protect themselves against such large judgments, or else risk destroying their business entirely. (And who is going to invest in that?) As a condition for continued coverage, they would be required by their insurers to submit to regular audits and comply with certain safety and waste handling procedures, etc. If the company won't submit to these regulations, insurers just jack up the rates--it's riskier to insure them, after all. The audits and other compliance are cheaper by design, so companies will go that route.
This system provides a balance between the interests of the companies affected by the regulation, and the people who would be affected without it. Insurers don't want to impose onerous regulations lest the company choose a different, better insurer. But insurers don't want to do too little, else they're liable to be mispricing their insurance and end up losing a bunch of money. And corruption is gone, because there's no sense in letting a company you're insuring change your auditing procedures when you believe that's going to cost you money. Better yet, the regulations put in place are preventative rather than reactionary. While a monopolistic regulator motivated primarily by politics may simply react to events that have already occurred and put in place regulations to ensure they don't happen again, insurers actually have an incentive to imagine the worst-case scenarios and design policy to prevent them in the first place.
Would this work? You decide. But at least get your opponents' arguments straight, first. Otherwise we're never going to get anywhere.
I don't know about you, but where I live, there are constitutional laws imposing limits on government power, and so it cannot be said the government owns the entire country, and certainly not the lives of everyone in it.
I find it completely acceptable to censor certain comments and encourage others to censor, too.
There's a difference between doing it on your forum or blog, which you own, and doing it for your whole country and everyone in it, which you don't.
The term frontrunning can be used to refer to the illegal practice of a broker placing his own order ahead of that of his customers', but it can also be used to refer to any practice which attempts to trade before another known trade, such as watching the trades in the market and determining, statistically speaking, when an index fund is re-weighting its positions, and buy/sell ahead of them on the stocks they haven't yet traded. The former is illegal, the latter (relying only on public information) is legal.
True arbitrage, say of the same asset between exchanges, does increase liquidity; I was unclear. I meant trading with non-equivalent (but similar) stocks; buying Coke when Pepsi goes up a fraction of a cent, and vice versa. Such a strategy can spread volatility from stock to stock. Alone, I would say it usually decreases volatility, but that it can also increase volatility as well, depending of course on what the other parts of the market (what it is arbitraging with or against) are doing. I believe the detractors primarily focus on the volatility increases, and the supporters primarily focus on the volatility decreases. *shrug*
Thanks for the informed reply. I'm aware that the crash you mentioned and the crash I mentioned are not one and the same. The link you gave provided little insight into its cause. Do you have any more information about it? The crash I mentioned wasn't due to a fat-finger trade either, just a really large trade placed as a hedge, but done in a time of low liquidity.
As for what I would consider HFT: it is a bit of a grey area and hard to draw a precise line, for which I'm sure you'll forgive me, but as I see it, it is entirely independent of the "why" the trades are being made, just the timing, and is a bit of a relative thing: how fast a trade is turned around, how new the information must be to act on it, and so on, somewhat relative to what everybody else is or had been doing. Things like holding a stock for 10 seconds before selling it, getting your orders in before anybody else, and so on, and doing this regularly and as part of a business model--these things I'd call HFT.
My focus is on the underlying mechanisms the trader/algorithm uses, not any kind of official designation or requirements. Automated market making would therefore in my opinion fall under this category, for most liquid assets. (For less liquid assets, trades are likely slower, so it'd be something I wouldn't consider high-frequency.) Officially designated market makers, under this perspective, are simply HFTers employed with a specific algorithm (make trades at the quoted prices) and specific requirements (always stay in the market / provide a minimum amount of liquidity at all times). In exchange for these requirements, they may get certain benefits such as liquidity rebates or better information.
I would like to point out that much of the debate as to whether HFT increases or decreases volatility hinges upon what exactly you consider to be HFT. If you take market makers and arbitratrageurs out of your definition, if you even can (you pointed out the difficulty here), I believe most of what is left is going to be those increasing volatility. And then you could say HFT increases volatility, or removes liquidity. But doing that seems a bit arbitrary to me. If you look at it from this perspective, I think you can understand why people make the claim that HFT reduces volatility or adds liquidity. How would you define the line and why would you put it there?
Good luck getting a thoughtful AND informed take on HFT here. You might get one or the other, but not both!
Ah, you must be referring to quantum argumentation and the political uncertainty principle.
"Converting in to cash" means this: let's say I want to sell 1 share of GOOG. GOOG is trading at 900-ish right now. So I'd get about $900. Great.
But now let's say I want to sell a billion shares of GOOG. Every sale needs a buyer. Am I going to be able to find enough buyers willing to buy a billion shares of GOOG *all* at $900? No, probably not. I'll get $900 for the first share, maybe even the first ten shares. But after I've exhaused the buyers at $900 I have to start selling at $899.9999 or so. And then $899.9990 maybe, on down the line. (Also, trick question: it's impossible, there are only 331.77M shares of GOOG anyway. :P)
This phenomenon is called "slippage" and represents a lack of liquidity: it is harder to convert your assets into cash if doing so causes the price to drop as you're selling. If my first shares are sold at $900 and the last are 2% lower, then I'll probably have a slippage of about 1% on my sale, taken as a whole. GOOG is highly liquid, but nothing is going to be "perfectly liquid". When there is less liquidity, smaller traders can move the price more with their trades (by the very definition of liquidity). As such, the quoted price you see (which in the case of stocks is typically the price of the last trade) is often harder to predict or swings more (higher volatility).
But not all HFT is "adding liquidity" which is why there's a bit of a debate about whether HFT increases volatility or decreases it. The answer is that it depends on the kind of HFT.
I wouldn't say EVE is purely unregulated. First of all, the developers make conscious decisions about what prices they would like to see for certain things and what incomes should be obtained for various activities, and (try to) adjust the item creation and/or disposal mechanisms to direct the economy. There are also (unsubstantiated, AFAIK) claims that the developers use confiscated assets from banned players (botters, real-money traders) to adjust PLEX prices. And speaking of botters and RMTers: that's some regulation right there, moreso of botters than RMTers.
I think these activities by a central authority, taken to affect the market according to what they feel is good or to protect other players, are tantamount to regulation. That said, I certainly wouldn't call EVE as regulated as RL markets.
They don't take the rest of us with them. HFTers are often trading their own stock, or the stock of others who have already agreed to it; if HFTers make mistakes and lose it all, it's on them. I say if they make mistakes, let them fail. If they are trading neither their own stock nor the stock of others who have already agreed to it, they may be criminally liable for fraud (IANAL).
To be more explicit: If you own 10 shares of stock, it doesn't matter if there's a flash crash for a few minutes while people get their algorithms back in shape. You still have 10 shares of stock through the whole thing. You don't gain or lose *anything* unless you make a trade before the price returns to its sane level. Any changes in the value of your portfolio when you make no trades are known as "unrealized" gains/losses which represent the dollar-value you would have *if you were to make a trade at that time*. When you make a trade, you "realize" that gain or loss.
But I understand your concern: businesses do typically pass their costs on to their consumers, and I won't say there is no regulation needed. I believe what is needed is that it be very clear whether or not *your* shares are being traded without your explicit consent for every trade. Arguably, this is already the case, as investment banks are required to inform people of what they're investing in, and in this case, they may be investing less in stocks than in high-frequency trading algorithms. That should *not* happen unless the customer knowingly allows it.
Wiktionary says:
- A quantification of the degree of uncertainty about the future price of a commodity, share, or other financial product
And wikipedia says:
- In finance, volatility is a measure for variation of price of a financial instrument over time.
As liquidity increases, we can trade more without affecting the price much (leading to lower volatility, whichever of the above definitions you like); as liquidity decreases, smaller traders can have a large impact on the price (leading to higher volatility, again whichever of the above definitions you like).
Of course, I think you'll agree that the first definition is more difficult to measure objectively. Perhaps through option prices. Also, liquidity providers can pull out of the market at any time, so just because there's liquidity now doesn't mean it's going to be there in a few weeks, days, or even hours.
The issue at hand causing the disagreement you're seeing is that really that there are actually multiple kinds of "HFT". HFT is just high-frequency trading, which in simplest form is just trading more quickly than we've been able to do before. Very much more quickly.
Some kinds of trading, including high-frequency trading, add liquidity; participants that do this are called market makers, and market makers reduce volatility by making it cost more to move the price. (In fact, it is mathematically impossible for a market maker to reduce liquidity, other than by pulling out of the market (i.e., stop trading), just by virtue of how their trading method works: through limit orders, rather than market orders) Market making has been done for years and years and years, and was in existence well before HFT came along. People doing this used to be called specialists.
Other kinds of trading often, but not always, take liquidity, and are therefore capable of adding volatility. Most hedge funds, mutual funds, index funds will use this kind of trading. When done in HFT, it usually amounts to all the "evil" things or "dirty little tricks" you hear about when you hear about the bad side of HFT: frontrunning, tiny statistical arbitrage between similar stocks, paying to get market information microseconds before others, etc. In other words, this is the kind of HFT that gives the whole thing a bad name.
(By the way, the big "flash crash" came during a time of low liquidity, where a lot of market makers had already pulled out because the market was stressing their algorithms too much. This led to the stress overloading more market makers, causing them to pull out as well. A classic cascading failure. A lot of the algorithms that stayed in the market were the arbitraging algorithms, which weren't sure whether they were making huge amounts of money or losing it, because the prices were all haywire.)
Lolwut? No, it's the opposite, *by definition*. See here:
liquidity
2. (economics, countable) An asset's property of being able to be sold without affecting its value; the degree to which it can be easily converted into cash.
(emphasis mine)
What you need to understand about profit is that it is always at the expense of someone else.
I agree with most of the rest of what you said, but I can't agree here. Despite typically being measured with currency, profit is often subjective; in fact, that's why we trade in the first place: I want an apple more than I want the money you're charging for it, and you'd rather the money than the apple. When we complete our transaction, we both think we've gained.
Now if I turn around and sell that apple for twice what I paid for it, I'll have no apple and more money than I started with. That's certainly a more objective form of profit. But it still doesn't necessarily come at the expense of someone else! I could just be a retailer: as a business, I buy apples from people, cheap, but I aggregate (or deaggregate) them, hold them for a while, have to get rid of the ones that don't sell, to stick prices on them, to handle the credit card transactions, to do the advertising, buy the building and parking lot, etc. etc. But you're still willing to sell me that apple for "half price", because you don't want to have to deal with any of that stuff, and we're both okay with that. We *still* both benefit.
I'm not saying profit never comes at the expense of someone else, not at all. Theft is an obvious example. Even in a supposedly clear, negotiated trade it can happen: for instance, if you're unaware of the true value of what you're giving up (or getting)--this is called asymmetric information. In extreme cases, this can amount to fraud.
But to say profit is *always* at someone else's expense? Far from it.