More Warnings About High-Frequency Trading 500
bfwebster writes "From The Big Picture (a great finance/econ blog) comes a link to this New York Times article on some of the risks and problems of high-frequency trading on financial markets and a couple of 'gadflies' who are pushing hard to get some changes and reforms in how Wall Street handles HFT. Key question: when is fast trading too fast?"
Re:How fast should it go? (Score:4, Informative)
Why should shorting be banned?
Why should I not be able to promise you a stock tomorrow at less than todays price?
Either I made the correct prediction or you get a great deal.
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:2, Informative)
The stock market is about people being able to buy and sell securities that allows businesses to raise additional capital
FYI, the raising of capital stops when the IPO is completed. From then on, the securities change hands between investors, not between investors and companies. All the buying and selling that happens in the stock market, on any given day, is purely between independent investors. The company is no longer involved in the process, and the fate of their stock is entirely up to the market participants.
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:5, Informative)
The root cause behind HFT is
SEC rule 612
My advice is if you don't know the rules don't pontificate on the philosophy of the game's rules. You accurately listed several things that suck. I agree with you on your list and your interpretation of your list. Unfortunately your list has very little to do with why HFT exists.
Of-course the actual solutions aren't even accepted on silly public forums, and they are definitely not going to be accepted by the politicians
The SEC is controlled by private firms that control politicians, not the other way around. If you really want to destroy HFT, for whatever reasons, the way to do it is to convince trading firms that if you want sub-penny price discovery, you could continue the buildout of your rather baroque and expensive HFT infrastructure, or you could just tell your elected pawns in the govt to tell the SEC to modify rule 612 to force rounding to the nearest dollar or the nearest millionth of a penny.
If you round to the nearest dollar no one will ever (famous last words) accumulate enough capital to HFT. If you round to the nearest millionth of a penny then millions of dollars of infrastructure will only bring in fractional millionths of a penny times perhaps millions of trades per day or about a thousand bucks a year. Which compared to buying federal bonds at roughly 0 percent or soon to be defaulting muni bonds at -100% is actually not that bad of a return on equity, but anyway...
Either way the only way for HFT to exist is to set the quantum interval for trading to be "about a penny" which ... tada happens to be right exactly what its set to. I think the way the game's rules are set up precisely perfectly to maximize HFT profits does kinda indicate the people in charge of the market at the big firms want it to be that way, this is not some kind of weird coincidental engineering accident.
The only real long term effect of destroying HFT would likely be to heavily reduce the transfer of wealth from the FIRE sector to the telecom and IT sector. I'm not sure anyone outside the FIRE sector would benefit by that... I like having the FIRE sector crooks, in a small way, subsidize my IT and telecom service.
Re:How fast should it go? (Score:5, Informative)
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:3, Informative)
This is probably the most interesting article about HFT I've read yet, also comes with lots of interesting graphs regarding the rise of HFT over the last six years:
http://nanex.net/aqck/2804.html
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:4, Informative)
Mods, get a grip (Score:4, Informative)
This is so wrong. The reason it is called an Initial Public Offering is that there may be other public offereings, later, when the company decides to sell more of its stock.
Re:Well, Thanks for Setting Me Straight (Score:3, Informative)
I know you're asking a rhetorical question; but in this case, no, probably not. Read these excellent analyses by the inimitable Nanex [nanex.net]:
Knightmare on Wall Street [nanex.net]
The Knightmare Explained [nanex.net]
(and see the other links from there).
In short, it appears that Knight had a high-speed, automated order generator which they used internally to test their algorithms -- and they accidentally deployed it into Production! As long as their own algo was taking the other side of the trade, that's ok; it's all a wash. But as soon as someone else starts hitting their orders...
Unfortunately for our discussion here, it's not clear from the Nanex articles whether Knight found and killed the test order generator themselves, or whether the exchange's "circuit breakers" pulled the plug on them (which is why I said "probably not" earlier).
The parties who engaged in trading with them did very well indeed, thank you. Where do you think those $440 million went?
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:3, Informative)
"The Federal Reserve would more properly be called the Third Bank of the United States."
Not really. It would more properly be called the Third Reserve. There is nothing Federal about it, except that the Chairman of the Board is appointed by the President. It does not "belong" to the United States. The Fed is a collection of private banks, including a great deal of foreign interest.
Re:it's too fast (Score:5, Informative)
First: no ones pensions are changing in value because HFT.
Second: applying hearbeat will not mitigate HFT. This is basically how auction works, and some exchanges actually do heartbeating. But there are still HFT strategies running in this conditions, heck - there are event strategies that thrive on such a markets, as you can trade against participants who entered order early in the period and couldn't incorporate informations from the remaining time into they pricing decision.