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?"
Trading's Too Fast When It Ceases to Mean Anything (Score:5, Insightful)
Key question: when is fast trading too fast?
Trading is too fast when it ceases to mean anything. The rate at which these decisions are being made indicates that it is not going through a human mind. The stock market is about people being able to buy and sell securities that allows businesses to raise additional capital. It was originally a very social thing so much so that it could reflect the mood of the populace's strength and development.
Many ordinary Americans have grown wary of the stock market ...
Right you are! It's no longer about humans making decisions. It no longer reflects social aspects of a sector or country or world market. It's more and more about what algorithms your "opponents" are using and what your algorithms are set at. And that's where it ceases to make sense. I'm okay with some guy waking up at 3am and reading every newspaper in the world and beating me at stock trading. I'm not okay when the name of the game today [wired.com] is who can pay tons of money to have their own servers set up across the street from a major exchange with a special dedicated fiber going straight to them as they pay off said exchange. That's starting to become so abstracted from the initial concept of a stock exchange that these big firms have walled everyone else out.
... which they see as the playground of Google-esque algorithms, powerful banks and secretive, fast-money trading firms.
If only they were Google-esque algorithms, they'd at least be innovative. SNAFUs have shown they're far from complex and often so stupid they loose hundreds of millions. But, yeah, who in their right mind would play a game like that?
What the algorithms are buying and selling no longer make any sense, the turn around is so insanely quick on these trades that there is no point at which a normal human can say "Oh, that algorithm thinks that Microsoft stock is going up and will hold it for some amount of time." No, instead what's going on is someone put out a big pre-order for Microsoft stock and so the HFT guys are buying stocks at a lower price than that only to turn over and dump them almost instantly as the order actually comes through netting fractions of a penny.
it's too fast (Score:5, Insightful)
when your average investor is having an unseen tax applied to his transactions
which is what HFT is: an unfair tax by those who can afford the screamiest servers, the closest fibre optic connection, and the scariest code. it renders the idea of a fair marketplace a lie
the solution is easy: queue all trades on a heart beat
once every second, once ever three seconds, once a millisecond... whatever is agreed upon, all trades are queued up and then released on this schedule, and no one or nothing can surpass it
there are many complex unfair problems in life. but this is one with an easy solution. the problem is no finding the willpower to enact the change. as with many problems in american civil and political life, the will to do the right thing is polluted by the plutocrat's money
too fast (Score:4, Insightful)
A 5 minute hold on a purchased stock, either before delivery or before another transaction with it, would fix the HFT problem.
Though, if you listen to the people making money off HFT, there is no problem, and HFT benefits everyone through "increased liquidity". The problem is, the HFT system is flipping stocks on the ms scale, causing stocks to be less volatile (stagnant), and not really filling large time gaps of supply or demand that would cause liquidity issues.
The system worked ... (Score:3, Insightful)
Speed doesn't matter (Score:5, Insightful)
key (Score:5, Insightful)
Key question: when is fast trading too fast?
When it ceases to be trading and becomes gambling instead.
Basically, if you are looking at numbers and not meaning, you aren't trading anymore. Here's a suggestion for a totally impractical test: If you call up the trader in question and ask him what the company behind the shares does (i.e. which business it is in) and he has no clue, then he's not a trader, he's a gambler.
Re:How fast should it go? (Score:3, Insightful)
Re:How fast should it go? (Score:5, Insightful)
The function of the stock market is not to make you able to buy and sell stocks based on what other people might pay for them. That is an unfortunate side effect.
Some people like you have long since abandoned stocks as a way to distribute risk and capital investment among more than one investor. Instead you view it as a game where its all about tricking some poor sod out of their money. Where the fuck do this contribute in any way to anything? Personally i would be all over a stock market that was regulated back to what it was first meant to be, somewhere i could invest in good ideas and ventures based on how much they would pay off in dividends, not inflated stock prices.
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:2, Insightful)
It's more and more about what algorithms your "opponents" are using and what your algorithms are set at.
Only if you are in it for day-trading profits. And if you are, well, you deserve to be beaten senseless by some HFT algorithm.
If you're a long term investor, with a time horizon of many decades, this doesn't matter. For example, I have a stock I bought 15 years ago. It has gone up by around 3X in that time. HFT makes no difference to me when I've held a stock over many years or decades. The exact microsecond it sells doesn't matter to me after a period of decades.
The fundamentals are driven by stock valuations, which are based in what people guess about the future of the company. You can be as informed about that as anybody. If you believe a company will do well over the long haul, buy some of their stock. Don't worry about HFT. You don't have to microsecond-time your sale and beat some other HFT algorithm when you've made a lot of money over years, rather than little bit over seconds.
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:-1, Insightful)
The root cause behind HFT is high level of inflation (money printing), artificial interest rates that are forced down to support inflation [slashdot.org] and thus the consumers, who are forced into the stock markets, which become gambling mechanisms rather than investment platforms.
The real solutions are shunned [slashdot.org], the real solutions is to allow the people (market) set the interest rates, allow the people (market) choose what to use as money, prevent government from printing, from interfering with the economy, prevent gov't from deficit spending, ensure that all bonds pay actual interest rates, not fake ones, that support deficit spending, things like that.
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.
Re:How fast should it go? (Score:4, Insightful)
Nothing so extreme is necessary. You can kill the HFT nonsense with a few straightforward tweaks:
1. Put a random delay on every order, up to 60 seconds. This makes millisecond-level speculation worthless.
2. Assign a small fee (0.1%, 0.5%, something on that level) to every transaction.
3. Require sellers to make good on their offered prices. Don't offer a price you aren't willing to actually take.
Some combination of those would eliminate HFT as a useful vector of profit-taking.
Re:How fast should it go? (Score:2, Insightful)
Re:it's too fast (Score:5, Insightful)
"Liquidity" as the argument for allowing HFT doesn't really prove anything, either.
Okay, so it grants near-perfect liquidity. Great. So what? Is that more important than market stability and sane trading practices?
That is the real problem: that traders on Wall Street think the system should be set up exactly how they want it so they can make as much money as possible, but taxpayers will be there to bail them out when the shit hits the fan. Well, fuck that. The economy is too important to just let it run wild in this way. No one is guaranteed a completely free and open market. We have rules for a reason. Ending the HFT shell game won't drive anyone out of the market who was making a genuine contribution in the first place.
sorry but a queue actually does solve the problem (Score:5, Insightful)
pause. think. then post
Re:it's too fast (Score:5, Insightful)
"the solution is easy: queue all trades on a heart beat"
That's exactly the conclusion I came to after a recent tour of a bunch of HFT shops here in London.
Right now the fastest responder wins. This leads to co-location (putting your hardware physically in the exchange) and something called Flash Trading where, for a fee, you get access to bids fractions of a seconds before they enter the market.
This clearly isn't a fair, transparent market.
Put a heartbeat, 1ms or even as high as 5s, on the market. Market state only updates, in it's entirety, on that edge. And get rid of Flash Trading. That stuff is clearly not fair or even ethical.
The smooths out the unequal access to the best prices that currently exist for those that can afford it and even gives the algo shops time to more sophisticated analytics.
It's pretty shocking that, contrary to what you might think, the models that are driving the algorithms are pretty-simple minded and stuffed full of magic numbers. A senior guy at UBS admitted to me that there's absolutely no science involved in their construction. Verification is done on a monte-carlo type simulation with historical data and the model must continually be updated as trading conditions change. The quants are generally just looking for a new set of magic numbers that make the simulations profitable. Literally no-one understands how the models work and they bear absolutely no relation to the kind of 'Frost in Florida, Orange Juice futures up' kind of market conditions the man in the street might expect.
It's kind of frightening really that our pensions are changing in value based on the execution of these algorithms
Stock market is a rigged game (Score:2, Insightful)
James Angel, a professor at Georgetown University and a member of the board of Direct Edge, said Mr. Arnuk and Mr. Saluzzi were stoking irrational fears of a market that is providing good returns to investors.
Oh, really? And just which investors would those be? Certainly not retail 401(k) investors.
The problem with the stock market is not that nobody is making money, the problem is a handful of people at the top are making a crapload of money and everyone else gets bupkis.
The big institutional traders have faster-than-lightning systems that limit their downside losses. By the time most people get their 401(k) statement it might as well be scribed on clay tablets dried in the sun, it's ancient history. Those people are the ones getting boned by the Math of Loss.
Re:The system worked ... (Score:5, Insightful)
Nonsense. No one is against technology here. What is being decried is the unregulated use of technology to enable profit-taking by an elite class of investors who contribute nothing through their market manipulation, and instead have caused multiple "flash crashes" through their incompetence.
Just because we have the technology to do something, doesn't mean we should just do it, or allow it because it is possible. That our laws haven't caught up to this sort of thing doesn't mean it's perfectly fine.
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:4, Insightful)
what's going on is someone put out a big pre-order for Microsoft stock and so the HFT guys are buying stocks at a lower price than that only to turn over and dump them almost instantly as the order actually comes through netting fractions of a penny.
That would be "insider trading" and it's illegal.
The solution to this is to put a fixed tax on all stock trades. Make it unprofitable to buy/sell in this way.
Re:it's too fast (Score:5, Insightful)
Market inefficiency?
I stand outside a supermarket asking people what they plan to buy. After they walk in, I radio my friend inside who immediately buys every last one of those items off the shelves. As the person leaves the store empty handed, I offer to sell them what they wanted at a slightly increased price.
Not a perfect analogy but that's pretty much what my understanding of what HFT is; buy it before the other guy can, then sell it to him yourself for a razor-thin profit. Repeat thousands of times per day and you end up with a pile of cash.
Where is the market inefficiency that's being corrected here?
=Smidge=
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:3, Insightful)
I agree with most of your post except for this:
That was the original purpose of the stock market, but I'm not so sure that it actually plays out that way, at least for stocks. The primary reason for my skepticism is that once a company has sold its stock through an IPO, the company itself has little to gain through an increased share price. A higher share price means more money for the people who have stock options, but the company itself only benefits from the money originally raised through the IPO. After the IPO, most of the trading is done between investors and the company has little to no involvement. The stock basically becomes gambling chips with a corporate logo that you use to play a giant game of poker to attempt to win money from the other gamblers at the table.
This is spot on. The problem is that too many people in the media, politics and the general population still think that the stock price is a reliable indicator of the actual financial health of the company. These days it's more likely just the outcome of whatever algorithms the automated trading systems are using.
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:5, Insightful)