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.
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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 va
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:4, Informative)
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:5, Insightful)
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:5, Funny)
Goldman&Sachs would go belly up in a week. So yeah, no downsides.
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:5, Interesting)
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.
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.
This is a good point. But then the question becomes: what good does HFT provide? A lot of smart people are sucked into that sector because of the money, where they are arguably causing a net loss to society by participating in an arms race that does not produce any real goods or services. Those smart people could in principle be contributing to research and development in areas that actually improve everybody's standard of living, such as medical research and robotics - or perhaps even in economics when it comes to analyzing long-term successes (after all, genuinely improving the capital allocation in the long-term could be beneficially to society, unlike the short-term gambling that is happening these days).
With that in mind, there needs to be a discussion on how best to disincentivize this kind of extremely short-term behavior, where it is via transaction fees or via trading on heartbeats.
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:4, Interesting)
Well, Thanks for Setting Me Straight (Score:5, Interesting)
Obviously I can't really elaborate on algorithms, but suffice it to say your understanding is naive at best - you're talking 2004 type games.
Great so you can't tell me why my understanding of how HFT works is wrong and I'm talking about "2004 type games" which would explain why I read about automated trading algorithms losing Knight Trading $440 million two months ago [slashdot.org]? Tell me, all those protection measures and penalties, did they protect the company running the automated trading software or the parties who engaged with trading with the automated trading software?
This stuff is almost always blown out of proportion and you'd never read about the actual workings of the regulation and clearing processes which protect all players
"Protect all players" you say? So that would mean that everyone gets paid when someone screws up big time? Well, I bet they're learning their lessons. I think what you mean is that it "protects the big firms that are doing the HFT" while the market is just a big massive beast ripe for the skimming?
And when trading systems do go awry most exchanges have built-in and often automated undo not to mention penalties.
So, when I buy stock in Wal-Mart and my "algorithm" (my brain) was screwed up, where's my automated undo button?
This is a game where someone's loss is almost always another party's gain. There is no way to "protect all parties involved" with that sort of game. It's the nature of the goddamn game.
If you're just some guy taking the highest paying programming job, I'm not mad at you -- that's capitalism. But if you're actually running the show or defending your boss, you and I are basically at polar opposites. HFT doesn't provide anything and receives an insane amount of cash. Betting on arbitrages isn't betting, you're basically taxing everyone else little bits of money and just being a huge fucking leech.
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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 gene
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There's only one thing to understand here: Private firms perform HFT and private firms would not do something that did not make them money. Private firms' interest in HFT is not to waste millions of dollars putting in crazy infrastructure just to help day traders strike it Romney Rich; their interest in HFT is to pull more money from everyone else in the stock market into their own coffers.
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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 part
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: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:Trading's Too Fast When It Ceases to Mean Anyth (Score:5, Interesting)
The rate at which these decisions are being made indicates that it is not going through a human mind.
Why's that a problem? Index trackers don't involve human minds either.
I'm fine with HFT. My only conditions are:
1) No rollbacks for HFT trades[1]. You screw up you eat the loss.
2) If bailouts are needed for whatever reason (your company loses billions of other people's money), the traders involved (if any) and the bosses go to jail for 20 years.
3) The exchange only allows you to see what everyone else sees. No "peeking at other people's cards".
If they still do HFT with these conditions we might eventually see an improvement in algorithms, software quality and testing.
[1] Rollbacks are only allowed if it's not your fault e.g. the casino aka exchange screws up big time (slow downs don't count, going down doesn't count, exchange treating 1=2 counts, exchange treating buy as sell counts.).
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Without the conditions I state, HFT would not actually be trading but just a fancy way of disguising the transfer of money from nonHFT/nonfavoured traders to favoured HFT traders.
After all I can easily make money in a casino/market if:
1) My big bad bets are rolled back
2) I get a bailout (and keep my bonus +commisions) if I screw up really big time - betting using other people's money!
3) I get to see other people's planned moves before their move takes effect AN
Re:Trading's Too Fast When It Ceases to Mean Anyth (Score:4, Interesting)
I see it as more of a high-end gambling. You're trying to make money, with money, hoping to outguess someone else. It's really not all that different than going to vegas and playing the poker table. If you can find a few suckers, and avoid being one yourself, you can make money.
All these people are doing is trying to speed up the process and make it easier to do. Some opportunities may only exist for a few seconds. Someone decides to sell when they shouldn't and causes price to dip momentarily. If you have automated systems in place you can take advantage of it better.
The problem of course is the computers can get really twitchy and cause shockwaves of trading to occur. My favorite thing to watch is how people scream about how all this money "just disappeared". Idiots. The money was never there to begin with. There was just an opportunity for money and now there isn't. Big difference. Money doesn't disappear, liquidity disappears. But that can cause problems for companies that are running closer to the edge. When there's a "crash", the money is just taken back out of the system. 100% of it CAME from the investors (the public) and for awhile some of it was in the hands of companies, selling stock is like getting a loan from the public. A crash just means people try to take their money back. They won't get it all back, the company has some of it and the public has some of it. No money disappears, you just don't see as much anymore.
It's all an illusion created by liquidity. It's like a group of three friends passing a $1 bill around. All three of them see $1 and get the impression that it looks like $3 since all three of them see $1. Until someone pockets the bill and the other two don't see it anymore, and start freaking out wondering where the other $2 went. A loss in liquidity makes people think (their) money has vanished, and someone must be to blame, and tends to cause a panic.
Same effect with stock. If you buy a stock from a company for $1, where's the money? They have $1 cash and you have $1 in stock. Does that mean that $2 exists in this closed system? NO. There was $1 and there still is only $1. If you turn around and sell your stock back to the company, you have $1 cash and the company, well their own stock isn't worth anything to them unless they can sell it so they really have nothing. So now we went magically from $2 to $1 as a dollar disappeared? NO.
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I see it as more of a high-end gambling. You're trying to make money, with money, hoping to outguess someone else. It's really not all that different than going to vegas and playing the poker table. If you can find a few suckers, and avoid being one yourself, you can make money.
You have been suckered. This is not the above. It is a Ponzi sceme - these people are not gambling their own money, they are gambling someone else's and get a percentage of both wins and loses The faster they go, the more times they
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A bigger issue of one of societal dependence. As a society we have become dependent on the stock market. Entire government policies are built upon it.
Rather than the stock market being this private business to raise capital for other businesses, it has become something society and government have deemed an essential. Entire policies are based around making sure the stock market goes up or growth occurs or certain people make money.
Inflation is also pretty much mandated by the government so you NEED to inves
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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.
An IPO is a business raising additional capital; everything else after that is psychology, almost the second thing you said. The stock market is about none of that though; it's about person A swindling person B out of their money.
The stock market shows the opinion of the market's major buying and selling power on a security. The security starts to slow and peak when the minority are the only ones in the buy-buy-buy cycle. They're out there screaming "BUY BUY BUY OMG GOLD IS GOING UP IT'S GOING TO HIT L
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The thing is, there's no proper speed. None.
OTOH, there are definitely improper speeds. My idea is that there should be a floating tax rate on stock transactions, that increases with the speed of the transaction. I think it should hit 100% at around a microsecond, and 0% at 5-20 years, and scale logrithmicly in between. (OTOH, linearly would be simpler to understand and implement, so maybe that would be better.)
Perhaps linearly is the correct answer, since if you are doing fast trading, the taxes would
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.
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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
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You don't gamble if you can have a working market that gives you a normal return of about 5-6%.
Right, because mgmt which currently demands a ridiculous rate of return above the market would do a 180 if returns were higher and maybe demand a lower return than the market or something. If the market returned 5% you'd just end up with some exec trying to get 10% implementing HFT. I'm not buying your scenario.
I don't want to 'ban' anything except gov't manipulation of money.
Right and a HFT bashing discussion is a good horse to hang on to in order to push another unrelated agenda. An agenda which I happen to agree with. But I don't think your tactic is helping "our"
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Who said that I want to "destroy HFT"? Where does that come out of? It is a market decision what to do with HFT, the reason that the HFT are taking over though, is a response to the free money that is provided by the gov't to the banks and thus various 'investor' firms to gamble with. The reason people gamble with money is because it's not real, it's fake. You don't gamble, you don't take crazy risks with your actual savings. Also you don't gamble if you don't expect to be bailed out
All the people who've gone to 'Vegas and lost their shirt (or at least lost money they couldn't afford to lose) disprove your point.
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"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.
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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.
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There's nothing wrong with group ownership and representation.
I suppose you want me to say I own shares in lots of companies and know nothing about them, but that isn't really true. I have very fractional ownership of a few mutual funds. Your average person with money in some kind of fund doesn't actually own any shares. The fund owns the shares and is responsible for them. As an average joe investing in funds, you're simply saying 'I have decided to trust this body to know about companies and buy shares pa
How fast should it go? (Score:2)
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.
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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.
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I think selling stuff you do not yet own is legal, otherwise how would drop shipping work?
Regular trading leads to manipulations ( people not just predicting that the stock will go up but having interest in that stock going up and thus acting through various means towards that end ).
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No, no theft required. Let's keep this simple and have two actors.
Let's suppose that the company in question is about to release its quarterly results. Rumours are that it will be a poor quarter.
Actor A is going long on the stock, he thinks that over time (in the long run) the company will go up in value. He represents the long term investors in the stock market, the pension funds, the banks etc.
Actor B (for whatever reason) thinks the price will go down in the short term. They represent the analysts/tradin
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You are going to need a citation for that.
Shorting, or buying or any other market activity is based on you believing it is not a 50/50 case.
Gambling is what the stock market is, we crossed that bridge long ago when dividends stopped being the norm.
Re:How fast should it go? (Score:5, Informative)
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Yeah, I don't really understand the anti-shorting rhetoric.
HFT I vehemently disagree with, it's so divorced from anything to do with the stock or company being traded that it's ridiculous. But shorting?
Shorting is trying to monetise knowledge (or presumed knowledge) of a stock movement. It's just that the knowledge is about a future fall instead of a future rise.
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.
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i could invest in good ideas and ventures based on how much they would pay off in dividends, not inflated stock prices.
You might invest there, but few other people would. See its like an onion and no matter how deep you think you've dug there's a deeper layer. I REALLY don't want to invest in dividend stocks because I want to control when to pay income taxes on my investment's growth. I do own some electric company stock and some PHB at the powerco decides when and how much tax I should pay on their growth. I hate that. Which is probably why I have less than 5% of my investments in dividend yielding stocks. I would mu
High Frequency trading (Score:3)
If you pay a flat $9.95 per trade, and you do it fast enough (say 1 gigahertz) you'll be spending more money than the national debt in a few hours.
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That seems like a rational solution, but it would need to be a percent of the stock value. For BRK.A $9.95 is nothing, but if you were trading only a few shares of GKNT then this would pretty much prevent you from ever making any money.
Re:High Frequency trading (Score:5, Interesting)
This is why I favor a 0.1-0.5% fee. If we really want, we could also assess the fee as an inverse function of how long you've held it: the longer you've held the stock, the lower the fee, and it gets exponentially smaller with time until it is insignificant.
But if you want to trade something you bought 5 seconds ago? Enjoy your 90% fee.
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What kind of idiot buys a stock they end up selling a few seconds later? Think before you buy, genius.
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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
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I like your solution.. Mine, in previous posts, was to add a random delay (less than a second) to all trades and apply a tax. The tax would be very minute - it would go unnoticed to everyone except the people making a ton of trades.
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Those are the same ideas I've had.
There are plenty of ways to approach it, but the reality is, there are too many people making too much money to go along with any of this willingly. It would have to be mandated by law.
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Those are the same ideas I've had.
There are plenty of ways to approach it, but the reality is, there are too many people making too much money to go along with any of this willingly. It would have to be mandated by law.
Tell ya what, while I don't know enough about economics to personally confront my Congressperson about implementing these very good ideas y'all have posited, I'll happily add my name to a Change.org petition anyone creates to that effect, and recommend all I know sign it as well.
Re:it's too fast (Score:5, Interesting)
Wish I had mod points for the parent here.
The key point HFT people keep harping on is increased liquidity. The issue is that at some point, a point we reached long ago, that increased liquidity became meaningless to investors and the HFT tax became a burden. Even institutional investors pay this tax. Only other HFT traders care now.
They are skimming money off the top, adding ZERO value to the market, and pissing off just about everyone.
But they have the money, so they can prevent regulations from limiting this... (plus regulaiton are always bad, right?)
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If they are skimming money consistently, then by definition they are still adding liquidity. You can't make money off of arbitrage unless there's a market inefficiency to be corrected.
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=
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Orders (intents to trade) are visible to everyone only when they enter the exchange, so there is no "guy standing in front of supermarket". What you described is 'flash trading', and it is dodgy and almost no exchange is allowing for that this days.
HFT is a guy buying bottle of coke and then reselling it shortly after, when the price has been increased by $0.01, rinse, repeat, leave the supermarket at the end of the day richer and with no coke at all.
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.
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Is that more important than market stability and sane trading practices?
When was there ever market stability and sane trading prices?
This is exactly why you are wrong. HFT is something for you to rally against only because you feel that you must rally against something but have absolutely no idea what that something is supposed to be.
I've got a hint for you: Its monies influence on government, not HFT. This is something you wont accept as the root of the problem because the solution is a smaller, less powerful government, and that goes against your core belief system.
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So basically what you're saying is that the stock market should be a game of Civilization [wikipedia.org].
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
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.
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"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"
But with a heartbeat you wouldn't see the early order until the quantum elapsed. All orders would appear to have been placed on the period
"First: no ones pensions are changing in value because HFT."
Odd this then:
http://www.professionalpensions.com/professional-pensions/news/2169298/frequency-trading-hitting-scheme-funds-railways-pension-chief [professionalpensions.com]
sorry but a queue actually does solve the problem (Score:5, Insightful)
pause. think. then post
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and that's ok. that's a different problem, if you can consider it a problem at all
the problem now is that you place an order, and some guy is making 8 or 10 transactions in front of, because of, and off of your order before you even get a confirmation. you are paying him a tax, he isn't adding anything to the market, he's just parasitically leaching value from it and not adding anything of value himself
except for another confirmation of the age-old lesson that those with money can make more money off the re
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And the hearbeat will not equalize anything - still the winner will b the one who'll insert the order just before the tick.
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.
No Incentive (Score:2)
HFT could be curbed simply by raising the execution price for each consecutive trade a firm makes in an hour (or even in a minute). Won't affect most traders, but HFTs would become more expensive. There's really no incentive for the exchanges to do this, since they're raking in millions in co-location fees and they're able to claim lower execution times for most trades.
The system worked ... (Score:3, Insightful)
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There's the answer. Tech happens, get used to it. The key is getting the price down so everyone can play in the sandbox.
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So how can everyone afford server rack near the exchange?
Should the exchange provide those private fiber links for free?
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.
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They don't lose money. Look at the last time they screwed up in a major way, the exchange reversed the trades.
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Speed doesn't matter (Score:5, Insightful)
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If we were not dealing with HFT you would be correct. Instead HFT adds a tax to all the transactions you are talking about.
Re:Speed doesn't matter (Score:5, Interesting)
Except that if you have sell triggers set based on normal movements of a stock and it happens to get caught up in a flash crash, it could easily execute at the low price then bounce and you'd never have time to react.
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You can use options to avoid limit sell crash losses. Instead of placing a limit sell you can buy a put.
Damn those "evil derivatives" and their benefits to the common investor.
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Don't worry about frequency (Score:2)
Don't worry about frequency - just make them pay for it.
Price per stock traded per day. Trade in one stock, your daily fee is $X. Trade in two stocks that day? That'll be $X^2. Your third trade will cost $X^3 and so on. (Or some such similar mathematical relationship).
Then if you make the one good, careful decision, you aren't penalised. If you make multiple trades that are sure to make you money, you aren't penalised. If the market for that stock is collapsing and you NEED to get out, you'll pay it.
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.
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Trading vs gambling vs skimming (Score:3)
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.
It seems to me that there's always been a significant element of gambling in the stock market. In excess it's a problem, but it doesn't have to be.
No, the problem is when it ceases to even be gambling, and becomes a sure thing. That's when you know that something's gone wrong. As I understand it, the whole point of HFT is to avoid the problem of actually taking any risk in the stock market, and making sure that the people running them can just make sure money at a certain rate.
That's waaaaay more of a probl
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Zero Sum, so where does the money come from? (Score:4, Interesting)
At such short timescales, trading is a provably zero-sum game. So where do all the fantastic profits that HFT operations claim come from? Everyone else. If you invest in a stock, during that process, an HFT algorithm (or ten) attempt to manipulate the market to cost you a fraction more, sweating the coins [wikipedia.org] that you might receive. (The rest of the time, the HFT algorithms end up fighting each other, but apart from driving the market unstable, its only the HFT operators who win/lose amongst themselves, the HFT industry gains nothing).
Yet they don't actually provide the much vaunted "liquidity": if they did, they couldn't extract the revenue by making the liquidity dissipate when its actually needed: if the HFT bots added liquidity, Knight Capital wouldn't have taken a huge loss, as they could have sold the stock they bought back to the market rather than having to lose $400M! selling the shares to Goldman Sachs.
It really is time for a microscopic but non-zero Tobin tax [wikipedia.org] on stock transactions: $.00001 per buy or sell request issued to the market. That should stop the bots from spamming the market with bogus requests, and level the playing field for everyone else.
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Yet they don't actually provide the much vaunted "liquidity"
Without them the spread would be wider, this is liquidity.
When it was the exception rather than the rule. (Score:2)
When H.F.T. first came out the approach of "buy when its going up and sell as soon as it ticked down" made some people a lot of money, because the H.F.T was just piggybacking on some human that had decided to move the stock for some reason that made sense. Now that so many of the trades are from H.F.T. algorithms what you have are computers piggybacking on computers moving the stock price all by themselves, and thus we have a feedback system with less and less damping as the percent of the trades that don't
goals and chaos theory (Score:5, Interesting)
Here's what most magazines and newspapers discussing the topic are missing:
A definition of what we want the stock market to be like.
Everyone is focussing on what they don't want. But that's not how you build a resilient system. Basically, that's using default-allow for your firewall. You'll be spending the rest of your life adding rules of what you don't want.
Once you switch around your mind, the questions become a lot easier. Decide what you want the stock exchange to be, and you get your answers almost for free.
If you want the stock exchange to be a place where companies can meet investors and get capital raised, then everything that doesn't serve that purpose directly or indirectly is out. You define how the process should work and allow only that, done. Everyone who wants to play games will have to do it within the parameters you have defined.
The whole problem here is that too many people still believe the old nonsense about the invisible hand. Yes, to some extent you can build a sandbox and people will come and build their sand castles. You can provide a market place and have the participants sort out how everything works.
But you will get scammers, fraudsters, thieves, HFTs and all the other scum as well. If your sandbox is an MMO, you will get gold farmers and scammers and spammers. If your sandbox is a stock exchange, you will get HFTs and stock fraud and insider trading.
Letting chaotic self-organization create the rules of the game through emergence is an interesting experiment, one that I enjoy quite a bit when it comes to games or small settings (book a weekend with friends in a summer cottage and something will happen, no need to set up a schedule beforehand).
Allowing corrupt idiot politicians to base the world economy on chaos theory was one of the dumbest ideas we as a species ever had. Read some catastrophy theory [gold-eagle.com] first (at least check out the graphic if the article is tl;dr). There's a reason we call it chaotic systems, you know?
Simple answer (Score:2)
As there's no limit to human stupidity, there will be none to HFT!
HFT can only work as long as there are humans directly involved in the trade chain and inclided to make (evaluation) errors.
Algorithms can be easily adjusted and even made "intelligent" to auto-adjust and auto-tune.
Then, once all trading will be done by computers with adjustable and tunable algorithms, HFT won't bring any real advantege any more.
Just infrastructure costs.
Content free (Score:5, Interesting)
The NYT article sucked. Can't wait for print journalism to die.
1) Here's some authorities who are authorities because we say so, who are fighting like little middle school drama queens
2) Everyone loves a good "rich people suck and they're corrupt
3) Rabble rousing tired old cliche of "kids have no idea what they're doing vs old people are obsolete"
If you want the real story try Stucchio's blog series beginning at:
http://www.chrisstucchio.com/blog/2012/hft_apology.html [chrisstucchio.com]
My pitiful TLDR summary of Stucchio's work combined with some other observations
1) Idiotic SEC rule 612 quantizes share price into small enough increments that you can raise the capital to HFT and increments that are large enough that you can make some serious dough doing HFT. HFT is not caused by Bolshevists in your bathroom or too many atheists or gobblin infestations, its caused by a stupid SEC rule that was created in a snap of the fingers and can go away just as quick.
2) Ask ANY EE or "real" telecom guy HFT is a real world application of dithering to improve resolution. Oh the "real" price of a share is 100.003 but we're only allowed to report price to a resolution such that its either of two quantum states 100.00 or 100.01. Simple system solution? Dump out 10 orders, 3 at 100.01 and 7 at 100.00 to meet some idiotic SEC rule. Now "everyone" knows the real free market price is signalled at 100.003 even if the unfree market is only allowed to trade at one cent increments.
3) Most of the whiners on both sides have a dog in the fight, if they are in the business and can't HFT for whatever reason they hate HFT and if they can they love it. Or they're just doing witchcraft style persecution where no logical mechanism is necessary... my sheep died therefore we should hang some old woman is no different than my dotcom bombed therefore we should punish a successful HFT trader "just because".
4) The ratio of HFT trading vs retail trading is absolutely exploding not entirely because HFT is growing (although it is...) but because retail trading is absolutely dying. Retail is dying for two reasons: Headed into next down leg of the second great depression (bubbles usually melt up in price and down in volume) and demographic stuff like looking at labor force participation graphs tens of millions of working age americans are no longer working, therefore there is no need to invest their 401K and IRA money from non-existent jobs. So yes HFT is growing but don't make the mistake of thinking the ratio of HFT to retail is in any way relevant, because retail is terminally ill and almost dead.
5) Some elderly/lazy people get all confused about frontrunning (which is illegal) because both frontrunners and HFTers are nuts crazy about low latency and fast execution. Therefore they obviously must be the same, at least to an idiot. This is about as intelligent as the anti-vaxers ... "Getting hit in the head by a 2x4 causes stupidity... high levels of lead in the blood cause stupidity... therefore getting hit in the head by a 2x4 results in high blood levels of lead". Morons.
6) Some lazy people enter market orders instead of limit orders. Probably not a wise idea any time in the last 150 or so years, although it is an even worse idea when retail volume is melting down and HFT volume is melting up. You could ban market orders for retail investors, but stupid people are always going to find a way to lose money, so I'm not sure there's any point to it. There's an infinite pool of ways for morons to lose money so removing one isn't going to really change the outcome. Its not the end of the world in that any average long term retail investor trade has just about zero odds of being stuck in a "flash-anything" related HFT event.
HFT Needs SEC Investigation (Score:3)
That is not necessarily the key question since it's not just the speed of the trades that is the problem. The problem is that companies are spending hundreds of millions of dollars to build data centers to host applications that are responsible for high-frequency trading. These applications are unregulated and have already caused at least one flashcrash. In addition to that, the software is also responsible for a mistake to the tune of nearly half a billion dollars and the investment firm actually got that money back when your average investor would not have gotten anything back. In addition to that, there have been suspicions and allegations that companies are performing highly questionable and possibly illegal actions hidden in these blink-of-an-eye manipulations.
I'll admit that I don't know exactly what these companies are doing with HFT and that's precisely the problem. All I know is that they wouldn't be collectively spending billions of dollars on it if it wasn't expected to be extremely lucrative. What I do know is that at any given point in time there is a finite amount of money in the stock market. And if HFT gets trading companies more money, then that money has to come from somewhere and if it's not coming from other trading companies, then it must be coming from the investors. That is why I have recently stopped trading and I refuse to start until there is a serious investigation and possible regulations against HFT. Without such oversight, at the very least I feel that the game is being rigged against me and at the worst, they could make a bigger mess of this than the mortgage-backed securities debacle that contributed to the last crash.
Simple fix to many problems (Score:3)
even penny tax per share would halt most of this (Score:3)
What is trading too fast? (Score:3)
Considering it pragmatically over the long term, trading is too fast when it amounts to betting or surfing rather than investing. Day trading and high frequency trading is not what public trading was intended for. It was designed to raise money for product R&D, and in exchange the people who fund the development will (hopefully) reap a return, either in a greatly increased share price down the line, or in the form of profit sharing (dividends). High frequency trading benefits only the brokers and a very select few "investors"[sic], and over the long term is bad for our economy and bad for our nation, because we have long ago forgotten the value of hard work, betterment of our nation, and improving things as a whole for everyone. It seems like everything is now born of a sense of an entitlement: "Gimmegimmegimme!" and nothing more.
The baby boomers have ruined everything for us, and for future generations. Thanks, guys.
Pathetic.
Blogvertizing (Score:3)
The submission is actually about ad harvesting by a blogger linking to NYT article written by someone who know nothing about subject matter for the sole purpose to gather eyeballs in first place. /. is completely beyound me.
How this amounts to "news" or anything remotely worth putting on
If you slowed it down (Score:3)
and had humans doing what the program do, it would be illegal.
Solution: taxes (Score:3)
Return Wall Street to be investment-oriented from trade-oriented. A 15% capital gains tax is too rewarding for a gain on stock that technically never makes it to the company it was supposedly and "investment" in, and thereby promotes trad-centered behavior.
How? By adjusting capital gains income (earned investment income) tax according to how long it was held:
less than 1 sec = 99%
1-5 sec = 98%
greater than 5 less than 30 sec = 97%
less than 1 min = 96%
less than 5 min = 95%
less than 1 hour = 93%
less than 4 hours = 92%
less than 1 day = 90%
less than 1 week = 85%
less than 1 month = 80%
less than 6 months = 70%
less than 1 year = 60%
[...]
greater than 10 years = 15%
and finally, and probably MOST important: make it Last In First Out - the most recent stock sold is the most recent stock bought. Pop the stack. Otherwise after 10 years it's right back to where it was.
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War on prosperity?
Have you lost your mind?
Yes, we should expect them to turn it off. For the same reason that if I had a machine that stole money out of your savings every night I would have to turn it off.
How would it go underground?
If the NYSE says all trades must occur at the same time, or in a queue, or charges $1 per trade, what would they do about it?
There are lots of solutions here, the NYSE should select one.
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The hardware could be free, the code installed on every machine shipped and HFT would still be very expensive in capital costs.
You have to be physically close to the exchange, the speed of light being a real bitch and all. Then you have to pay for the fiber link to the exchange and pay the exchange for the privilege.
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Exactly. This is a game the small investor will never be able to play, because of how the exchange is set up. It's a fundamentally unfair advantage.
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Then don't put it all in the stock market.
*Disclaimer- I am not a financial expert, nor should anything I say be taken as advice. Contact someone who knows what the hell they're doing and they'll likely tell you to hand all your money to them for safe keeping.