High-Frequency Traders Are the Ultimate Hackers, Says Mark Cuban 538
An anonymous reader writes "Billionaire Mark Cuban talks in an interview with the Wall Street Journal about how he thinks high-frequency trading can be quite damaging to stock markets. He goes so far as to call high-frequency traders the 'ultimate hackers.' He says, 'They're running software programs that have one goal, and that's to exploit the trading systems as early and often as possible. As someone who wrote software for eight years and who keeps up very closely with the technology world, that scared the hell out of me. The only certainty in the software world is that there is no such thing as bug-free software. When software programs are trying to outsmart other software programs and hack the world's trading platforms, that is a recipe for disaster. ... How many times an hour are there failures across individual equities around the world because of software running algorithms battling each other for supremacy to make a profitable trade? We have no idea. It's not a question of if or when we have meltdowns, it's just a question of how big and where. It's straight out of War Games. And that's before we even get to the possibility of nefarious or sovereign hackers getting involved.'"
This is insulting... (Score:5, Insightful)
It's also highly questionable (Score:5, Insightful)
It's commonly argued that HFT lowers transaction costs overall, presumably that's not such a simpl question, but ..
There are definitely rich people who make a lot less money now that HFT lowers *some* transaction costs. It's therefore worth picking apart the messenger's credentials a bit.
And the SEC, Obama, congress, etc. would actually regulate Wall St. if their lives depended upon it. Instead, they'd simply pass laws making HFT hard for smaller outfits, while granting Goldman-Sacks and Morgan-Stanly increased HFT.
Can you explain? (Score:5, Insightful)
The trouble with HFTs is they siphon money w/o adding value. As near as I can tell they're the definition of an economic parasite. Again, I'm open to being proven otherwise, it's just I don't see what value they add. They don't hold onto the stock long enough for the real investors to use the capital they put into the market. They just seem to drive up the cost for real investors....
As for Obama, he's got his hands full with oil and commodity speculators....
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your choice is this, high frequency traders taking a fraction of a penny out of every one of your transactions or we can go back to the way banks used to broke these deals where the cost was to the tuen of eights and quarters (of a dollar) instead of fractions.
HFTs hurt a few people the most: people who trade on inside information (because they parse behavior as shown by your trading faster than you can fool them), and people who were dinosaurs and needed to earn an eighth on every share to stay in business
Re:Can you explain? (Score:5, Informative)
As near as I can tell they're the definition of an economic parasite.
Of course they are parasites, but that misses the point. They are more efficient parasites! They do a better and more efficient job of market making than the system they replaced. A tapeworm that drinks an ounce of your blood every day, is better than a tapeworm that drinks two ounces.
Again, I'm open to being proven otherwise, it's just I don't see what value they add.
When stocks are traded, someone has to match up buyers and sellers. These are "market makers". In pre-HFT days, these were usually brokers, such as Merrill-Lynch, who were assigned by the exchanges to be market makers in certain stocks. They would buy and one price and sell at a slightly higher price. This price difference is the "spread". The HFT came along, and squeezed the market makers out by offering smaller spreads. Today the HFTs are the market makers, and Merrill-Lynch no longer even exists as an independent company.
They just seem to drive up the cost for real investors....
I don't see how you can possibly reach this conclusion. If they didn't offer "real investors" a better deal, why would "real investors" buy from them or sell to them? They offer better prices. The only losers are the old inefficient middlemen who got squeezed out of the market. Good riddance.
Re:Can you explain? (Score:5, Insightful)
Nonsense. They provide liquidity.
Out of curiosity, how would someone in practical real life terms use this millisecond liquidity, as opposed to say, being limited to five seconds or such.
I find it difficult to believe that myself as a mere human could use this sub millisecond liquidity for anything useful. I welcome an example where it's benefit is significant.
Re:Can you explain? (Score:5, Insightful)
It goes further than this.
If the "liquidity" provided by high frequency traders is valuable when performed on the order of milliseconds, then logically the extension is also valid: trading on the order of microseconds or even nanoseconds should be more valuable still.
Does that makes sense? Fuck no. It makes no sense whatsoever for a stock or a commodity to be traded in nanosecond timeframes. It's asinine. There is no possible way for this to make any sense whatsoever.
Hence, the only possible conclusion is that the original premise -- faster trades always provide more value -- is not true.
So, the question is, how fast do trades have to be?
HFT traders would argue milliseconds. Many people here have proposed seconds, or even minutes. Here's a thing to think about though: the markets close every day for hours, and the economy doesn't suddenly collapse due to this suspension of "liquidity". Hence, the logical conclusion is that trades could be performed as infrequently as once an hour, and nothing would really change.
Re:Can you explain? (Score:4, Interesting)
If the "liquidity" provided by high frequency traders is valuable when performed on the order of milliseconds, then logically the extension is also valid: trading on the order of microseconds or even nanoseconds should be more valuable still.
And what makes you think that isn't true? At some point the cost of providing a certain level of speed in the market may outweigh the potential profit from doing so. But faster trading does provide liquidity to slower traders and it provides advantages to those faster traders in responding to news events and other changes in the market.
Here's a thing to think about though: the markets close every day for hours, and the economy doesn't suddenly collapse due to this suspension of "liquidity".
Why not trade once every thousand years, if speed of market doesn't matter?
As an aside, I think we'd just see a continuation of present market structure. Humans would still trade on their timescales and HFT would still trade on its timescales, no matter how illegal you tried to make it. The only effect of lag regulation would be to move HFT to locations where it would remain legal. Those would become the real markets. Imagine a world where the stock market is a small piece of the actual market. It's just a place where the chumps, who don't have HFT, have to trade at a loss. Meanwhile the real markets are competing networks maintained by various deep-pocketed organizations which trade whatever they want to trade at whatever speeds they want to trade at.
Re:Can you explain? (Score:5, Insightful)
Why not trade once every thousand years, if speed of market doesn't matter?
Reductio ad absurdum [wikipedia.org]
Straw Man [wikipedia.org]
Take your pick.
Re:Can you explain? (Score:5, Insightful)
Why not trade once every thousand years, if speed of market doesn't matter?
I don't think his point was that speed doesn't matter, but that speed beyond a certain point (determined by how fast people can actually make use of an investment) doesn't matter.
Re:Can you explain? (Score:5, Insightful)
> And what makes you think that isn't true?
...
> Why not trade once every thousand years, if speed of market doesn't matter?
It's a question of using a sensible resolution. If you want to get a hacker-boner in a casino pitting bots against eachother, fine. Don't try to justify skim scamming traders making real investments, or pretend sub-second trades have anything to do with the real economy.
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Re:Can you explain? (Score:5, Interesting)
"The provide liquidity"
The market had adequate liquidity before high frequency trading, I challange you to find a reasonable arguemnt that it did not. The problem is the "more = better" argument being applied without any rational thought behind it. This is like using total calorie consumption in a country as a measure of health. In a place of absolute starvation it can be a worth-while absolute measurement: more calories is better. But once you hit a certain point you have to start paying more attention to distribution of calories, and then at another point more calories is damaging to health. We have long since hit the point where having more money flowing into the finantial sections of our econmy is just damaging, and that is totally ignoreing the evident distribution problem.
And high frequency trading does hurt you with you limit order: it makes it less likely that you are going to be able to make as much money out of your trades. They can try every combination up to $100 in microseconds to test the waters (without ever commiting to a trade) and so find the person willing to pay the least to buy that. Then they can figure out who is willing to pay a bit more, and in the blik of an eye become the middle-man, pocketing the difference. They have that unfair advantage over you, just because they are bigger and have more money. How is that ever going to benifit a just or equitable society? In a fair market your broker could have found the person willing to sell to you for $99. And before you argue that the high frequency trader is just replacing the broker, that broker should have been working for your best interests, if they are keeping the difference you can alwasy find a more moral broker.
Re:Can you explain? (Score:5, Insightful)
high frequency traders are market makers, not brokers. huge fundamental difference in the role of the two. You should read up on that and realize they only put market makers out of business, who were taking you for 12.5-25 cents back in the 80s instead of a penny here or there as they do now. Brokers, on teh other hand, have been put out of business by electronic exchnages and the spread of electronic brokers like etrade. In both cases though, computers doing the job have massively lowered costs for the end user (go see what you would have paid if the stock closed at 50 dollars and opened unchanged back in 1985 to trade 1000 shares vs now).
Re:It's also highly questionable (Score:5, Insightful)
There are definitely rich people who make a lot less money now that HFT lowers *some* transaction costs. It's therefore worth picking apart the messenger's credentials a bit.
Lowers transaction costs? Which ones!?
Two years and two days ago I used this analogy to describe HFT [slashdot.org]
Lets say you're at the supermarket.
You reach out your hand to take [product] off the shelf,
by the time you reach out to take another [product], the shelf is empty!
A HFT saw your first signal and then swept the shelf clean,
bought all of [product], and is offering to sell [product] to you at a markup.
Oh, and the HFT has done the same thing at every other supermarket you would visit.
Has the market been made more efficient?
Or is the HFT behaving like an anti-social asshole?
I'd say the answer to both questions is "yes,"
but that the needs of society outweighs the needs of the market,
which is why we have farking regulations in the first place.
The fact that we're still talking about this years later is not a good thing.
The only thing HFTers do is to sneak in between a mismatched sell and buy order so that they can steal pennies.
The stock market got along fine without high frequency trading and there's absolutely no reason to hang onto it now,
except that it profits a bunch of 1%-ers on Wall Street and their lobbyists.
Re:It's also highly questionable (Score:5, Informative)
Because that extra $0.02 profit now disappeared into the pockets of the insanely rich, instead of the original seller. In other words, HFT only serves to make the rich richer and widen the gap between rich and poor.
You know what happens when that gap grows too big?
Re:It's also highly questionable (Score:4, Funny)
You know what happens when that gap grows too big?
Pitchforks.
Gotta love Mark (Score:5, Interesting)
Mark is currently trending because of the way that he handled ESPN analyst Skip Bayless last week, on live tv. He completely owned.
http://www.youtube.com/watch?v=hv2jqFd2-qI [youtube.com]
Re:Gotta love Mark (Score:4, Insightful)
OTOH he trashed Facebook after the IPO, and looked pretty good until it was discovered that he was long in the stock.
Cuban is a weird hybrid, he's a smart guy and a tinkerer but he has more than a little Donald Trump in him.
System is broken. (Score:4, Insightful)
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Re:System is broken. (Score:5, Interesting)
Re:System is broken. (Score:5, Interesting)
Just as importantly, every single mortgage note should be hand transferred, recorded, and witnessed. If a mortgage holder cannot produce the note to a court, the mortgage is null and void, and a judgement entered by the court setting it in stone.
That should go a long way to preventing some of the fraud and outright theft that Wall Street has performed.
How many people have had their homes stolen, we may never know.
Re:System is broken. (Score:5, Insightful)
You're arguing that borrowers should be able to get out of their obligations
ABSOLUTELY NOT
I'm arguing that lenders should be required to prove they are the correct and lawful party to be making payments to, and the correct and lawful parties when attempting to sue someone.
The way it stands right now with securitization and loans being sold to multiple parties in some cases, you have no way of knowing if the lender claiming you owe money is really owed money in the first place.
Part of that problem was the recording of one lender selling the loan to another lender. They sped things up and got very, very, very sloppy. It should have never been possible to sell the same note twice (worth hundreds of thousands of dollars in many cases).
Re:System is broken (Score:4, Interesting)
That's the whole point about it being stored in the courthouse, in the same county as the property, for the lifetime of the loan.
If it is required by law to be a physical document, and that all transactions must be witnessed by an officer of the court, it is pretty damn hard to counterfeit a transaction without the illicit cooperation of an officer of the court.
It is already a matter of public record the ownership history of a property. All I am asking is that it become a matter of public record the history of any past or present loans against the property as well.
If you did that it would make very hard for anybody, home owner and lenders alike, to lie.
Re:System is broken (Score:4, Interesting)
Yup, and that is the system we had. Unfortunately, the companies thought that system moved too slow and had a high transaction cost. So they bullied the regulators to let them keep their own clearing house... which they didn't properly maintain. It's the dumbest concept ever, private companies self-regulate on who owns the land today and then tell the government at their leisure. Little wonder that we are now seeing the benefit of our great grandfather's line of thinking.
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I actually missed a word in there.
If a mortgage holder cannot produce the note to a court, the mortgage claim is null and void, and a judgement entered by the court setting it in stone
If that company cannot provide the note, then their claim should be dismissed with prejudice. Not just that, but the court should allow injunctions from the start preventing eviction, and allow for damages. That's what I meant. After the fact, there should be no mistake that they were wrong.
Deeds of trust are problematic too because of the law in most states that allows for the plaintiff to evict defendant without having to prove a damn thing. I've seen it countless time
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Re:System is broken. (Score:4, Insightful)
Re:System is broken. (Score:5, Insightful)
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I agree and would like to see the minimum hold time on stocks set at 30 days or a change in valuation of 10% or greater whichever occurs first. Then the stock flipping parasites could go to Las Vegas to do their gambling and the stock market would once again be only for investors.
No offense, but this is a dumb idea and would break the stock market.
There are plenty of reasonable proposals to neuter the effects of high frequency trading without cluster bombing the entire exchange system.
Most of the proposals are technical and not immediately obvious to someone who doesn't understand the market mechanics,
but we're talking millisecond to microsecond solutions here, not days or hours or even seconds.
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It's almost as if the markets are allowing this behavior to reward their favored parties, rather than to aim for fairness.
So, easy enough: start a competing market that implements fair rules. I'm sure between the SEC and the mountains of financial regulations there is room for a startup to disrupt the market...
Re:System is broken. (Score:5, Insightful)
BUT, wouldn't that be a great thing? The moron who had a software glitch would be out of the market in about 1 second cause his bank account (or those backing him) is empty. I don't really see a problem with putting $100 books up for $1,000,000. The fact that someone bought that book shouldn't concern us. People should have the freedom to make stupid decisions. Its the fastest correction system ever, takes money from those too stupid to keep it and gives it to those who would use it better... all entirely voluntarily! Because of this possibility, businesses have fail safes, fund transfer limits, and insurance to spread the risk. HFT is the worst thing for really rich accounts. They can't ignore it, and they can't keep from over leveraging it.
However, I do have a problem with how unfair the market is. If a company makes a mistake and loses 500 billion in pension returns for a 10,000 retirees, they get a small hit and tell the underlying investors... nothing of the reduced returns. The idiot fund manager won't make his 50% bonus that year. If a retiree questions, he is told that is just how the market works; risk/benefit BS. Never mind the fact that if the company just returned all the fees, bonuses, & taxes they took for prior year's returns which were undone by this loss, the investors would be whole.
Now, if a single unregulated independent fund manager loses a 100 billion dollars for ~2500 people... we plaster him all over the news, make sure he gets put in jail, demand that the orders be undone, demand the regulators or government make people whole, blah blah blah. He was bloody unregulated, these "investors" could have just as easily gone to a casino! But NO, they are powerful people and we need to kiss their toes.
At the same time, we dare not regulate the unregulated independent fund managers who continue to mail monthly statements of high returns. And companies scream that we restrict the big companies who manage retiree funds too much.
THAT's the REAL problem with the markets.
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"THAT's the REAL problem with the markets."
Well, yes, and that fits well with the statement I made elsewhere, that Wall Street is not "capitalism", it's just a casino. And a particularly bad one, in which the high-rollers get to shove their losses onto the little guy.
The REAL question: (Score:3)
The real question here is; just how far can we stretch the definition of the word "hacker."
Basically, he's saying that it's exactly the same thing to use a KeyGen as to write one.
A trading tax (Score:3)
The HFT programs would slow down a lot if it cost them, say, one cent per share traded. That would not be a burden to average investors, or even the super wealthy, but it dampens the enthusiasm for shifting millions of shares a day to skim tiny fractions.
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Two sides.... (Score:4, Insightful)
I chatted with some guys on an FPGA forum about this. They were convinced that HFT was good, as it increased the liquidity of the market.
I ran the line that it's bad, as it exploits that over the short term all players in the market do not have complete information on the state of the market, and is therefore a highly sophisticated form of insider trading.
In truth it it is just a mechanism to suck wealth away from those who actually create it (or invest in stocks of companies that create wealth), and does more harm than good.
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I chatted with some guys on an FPGA forum about this. They were convinced that HFT was good, as it increased the liquidity of the market.
You can increase liquidity without siphoning billions from the market.
Anyone who tells you otherwise is full of shit...
Or maybe they're unaware that stock markets functioned before the invention of high frequency trading.
I mean, JP Morgan and friends were "market makers" [wikipedia.org] back when trades were sent out ticker tapes.
They certainly didn't need racks of servers running custom code to provide liquidity back then.
Transaction tax (Score:5, Interesting)
Much like spam mail, HFT would cease to be an issue if a transaction came with even a tiny overhead. (And in both cases, I doubt it'll ever happen.)
fix it. (Score:4, Insightful)
Or remove the ability to post a bid then remove it before it can be actioned. Make any bid stand for a minimum time before it can be withdrawn. 10 seconds would be long enough.
On the downside, if you fix it, you don't get all the fancy new superfast internet links.
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What you are proposing is patching the exploitable bugs.
That's good, and needs to be done. And it is not enough. In security, we learned a long time ago that whitelists beat blacklists. If you can enumerate acceptable actions, you are much better.
So what needs to be done is putting down a definition of what proper deals look like and enforce that. Minimum standing times is one criterion. Obligation is another. There are certainly more if we put our minds to it.
But the main issue is entirely different. It is
Comment removed (Score:5, Informative)
Even done correctly, it's still bad for society (Score:5, Insightful)
Done "correctly," HFC is bad for society because, like insider trading done "correctly," it specifically screws the "have nots" to benefit the "haves."
Yes, the screwed-up trades are a problem, but those are the side-show. The real problem is that those with the ability to do HFC can use that ability to "jump ahead in line" and screw those who don't have this ability.
Why aren't capital gains taxed the easy way? (Score:5, Interesting)
Stocks/bonds/commodoties have an undodgable tax of 0.2%? This is collected out of the trade automatically and sent to DC in real time.
I'm not in a thinking mood whether this should be on sales or purchase. It would hurt high frequency traders because they'd be paying mad taxes, but people who invest like a sane man for long term the tax is negligable.
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The problem is that, they don't need to rely on the stock market to do the high-frequency trading. Options (the right to buy/sell something for a predetermined term) is a good candidate, and there are all sorts of markets that can mimic any stock or commodity, while regulation is nonexistant.
Good luck writing the tax code for every single financial instrument.
Actually, We in Korea have a small tax for every trade on the stock market. The HFT guys are running on the derivative market, where they merely tra
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No, the problem is that the HFT traders are still trading de facto stocks, which looks like stocks, acts like stocks, but aren't stocks. Derivatives are tightly linked to the original stuff they are based on. The only difference is that they aren't taxed, but the broker takes a hefty transaction fee.
Rate limit (Score:3)
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And also introduce a random delay between 5 and 15 minutes of each transaction. That would definitely make it harder to exploit the system.
The solution is pretty simple (Score:3)
Slow trades down to the human scale.
lets say trades have to be processed in "ticks"... and the ticks could be once a second or once a minute. But the idea is that trades are ONLY processed in the ticks. You can queue trades between ticks but the trades only happen in the ticks.
If you have a system that a milisecond faster then anyone else it won't really matter that way. The trade won't happen until the tick processes.
Once a second is still pretty fast. Once a minute is more reasonable. But because a tick is an arbitrary time span we can change it to be whatever you want. It can be once every ten seconds. Or once every five seconds.
What's important here is that it's slow enough that people can follow it.
High Frequency Trading and Systemic Corruption (Score:3)
If capitalism is functioning correctly, costs are minimized via competition. Wall Street is composed strictly of "middle men". These institutions should be squeezed for profit like every other part of the economy. Instead, they have become the gate keepers, and now skim the bulk of the profits for themselves. The entire economic order has been altered so that Wall Street (and the other global banking institutions) make money without regard to results. Heads they win, tails we loose.
HFT is just one of the skimming methods. It starkly illustrates that the insiders have a strategic advantage and open competition is a myth. How can there be a level playing field when the privileged few who can install their HFT trading hardware right next to the NYSE machines have an intrinsic edge? Effectively, it is a casino and they are the house and everyone else is has a sucker bet. (Don't bother to respond that "anyone can make an investment that indirectly taps into this capability". You and I have to go though so many middle men that we see no meaningful profit.)
Bain Capital is another example. They structured their deals so the Bain insiders always came out ahead. By definition hedge funds use other peoples money. They are not taking the risk, the investors are. If hedge fund insiders come out ahead of investors, it is another case of insiders stripping assets from everyone else. Note that this is a completely separate issue from the impact of Bain on the companies that they acquired.
So suppose you go to Fidelity to invest, and they sell you one of their high end managed portfolios. It's composed of multiple funds also managed by Fidelity. Besides the fee to be in the portfolio (4% annually), each of the funds also charges a fee. The funds trade through the Fidelity brokerage, which also charges a fee. This is at least triple dipping. All the name brand investment firms are the same. If you have a 401K it is almost certain that you have been subjected to this scam.
Beyond this, the bailout from the 2008 crash rewarded the corrupt investment bankers that caused the problem in the first place. The general public in the US saw it's net worth reduced to mid 1990's levels while the stock market has gone up to record highs. This is, in effect, a transfer of wealth from the productive part of the economy to the corrupt insiders. There is class warfare in the US, and the ultra wealthy are winning.
There are two things to keep in mind:
The game is rigged.
All animals are equal, but some are more equal then others.
Let's call it what it is. (Score:5, Insightful)
Forget the hacking component, high speed trading is legalized theft. Think about it, the essence of equitable trade is a wealth transfer in which both parties contribute something: I give you money, you give me a loaf of bread, and we both come out ahead. Or in the case of stock you give me partial ownership in a company.
Granted stock trading has always had a certain element of gambling to it, but when it's humans it's still a matter of "I think this company is under-valued and want to buy in before anyone else realizes it". Basically it's a form of risk-management. High speed trading is essentially a man-in-the-middle attack - whereas normally stockholder A would sell buyer B their stock when they felt the market was overpriced, now they sell to speed trader S at a slightly lower price, and person B buys at a slightly higher price. Both A and B, the people actually looking at the market and weighing risks and benefits, have lost some of the value of their trade. Meanwhile the speed trader has profited by that value difference without contributing anything whatsoever to the transaction. They're parasites upon the market, adding costs and instability and giving nothing back - the sooner we ban them the better.
To hear them talk you could build a mid-ocean trading center along the data-lines as just pull money out of the air, making money from nothing. Here's a hint - if it sounds too good to be true it probably is: It's not pulled out of the air, it's pulled out of the pockets of people that are actually doing the risk-management the market was created for.
Stock markets are a total scam. (Score:3)
One of the purposes of a "market" is to provide a mechanism for price discovery. The markets have instead morphed into a giant scam operation which has nothing to do with this.
There is rampant insider trading. For example, check out the purchase of 'short' positions on JPM the day before the announcement of their big loss. It's blatantly obvious that someone got the info in advance. The federal government has an army of regulators as well as the FBI, and they do nothing to stop this theft.
I've pulled all of my investment $$$ out of the markets, except the equity funds I've got in my 401K., and I'm on the verge of biting the bullet and pulling that out as well.
Re:Is it illegal? (Score:5, Funny)
Re:Is it illegal? (Score:5, Insightful)
It's anti-free market for sure. They're skimming off the system without contributing a damn thing and adding inefficiency and misinformation into the markets. It shouldn't be illegal, but congress should enact a transaction tax on trades that is just big enough to make HFT not worthwhile.
Re:Is it illegal? (Score:5, Interesting)
"it is pure, unrestrained capitalism. What could possibly go wrong?"
It is nothing of the sort. Capitalism is a means of producing things. Wall Street produces nothing.
Wall Street isn't "capitalism". It's a government-endorsed casino. There's a pretty big difference.
Re:Is it illegal? (Score:4, Informative)
Capitalism is a method of allocating resources through the private sector and that's precisely what Wall Street does. If I give you money to start your business, did I produce something? How is that any different from a company like facebook (which I hate btw) going public and getting $16B to expand its business?
Capitalism is just one method of allocating resources. Another method of allocating resources is to have the gov't do it - i.e. communism.
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"Capitalism is a method of allocating resources through the private sector and that's precisely what Wall Street does."
This is precisely where you are wrong.
That is what Wall Street was originally designed to do. That does not mean that's what it does now.
Wall Street today is little more than a Fed <-> Bank <-> Finance Company <-> Government circle jerk. While at the same time, "regular" investors get no love.
Re:Is it illegal? (Score:5, Insightful)
Long term investing isn't gambling, but day-trading most certainly is. The number of factors that go into a stock price's short term movements are so numerous as to be incomprehensible. You'd have better luck predicting a coin toss based on starting velocity, wind speed, ambient humidity, etc., than you would predicting a stock's day-to-day movement based on all available data.
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Re:Is it illegal? (Score:5, Informative)
"How does efficient market theory explain all the millionaire and billionaire stock traders Manhattan and London?"
It doesn't, of course. But... given hundreds of years of solid evidence, it should. So... what is the difference? How did those things happen?
A few were smart. A few got lucky. Many of them already HAD family money.
Most of the rest is due to market-fixing, cronyism, insider trading, etc. [readersupportednews.org]
When the free market is allowed to work, it works. But we have over 100 years now of government and insider interference in the free markers, to the extent that they can hardly be called free anymore.
Sorry, but you can't point to a system that has been almost hopelessly corrupted, and call that evidence that the system as designed doesn't work. That's a logical fallacy.
Today's Wall Street is very, very far from a "free market".
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That's how things are supposed to work. Reality is not the same.
Re:Is it illegal? (Score:5, Insightful)
The companies that produce things raise money by selling shares of their company (stocks) or borrowing money (bonds) on Wall Street. So, no, Wall Street doesn't produce anything on its own, but it provides a service that enables others to. It certainly doesn't resemble a casino.
This BS is +5 Insightful?
Wall Street today, especially the HFT programs, exactly resembles a casino! When you're making million dollar trades, not based on valuations, assets or long-term business strategic planning but based on automatic triggers in a market with irrational herd mentality it is EXACTLY like blowing a wad of cash on a "hot streak" at the craps table or roulette wheel. There are thousands of HFT programs interacting in an unpredictable manner with each other in the market. There is no possible way to track that volatility and rationally invest in the short-term in such a market.
In fact, I was outraged when I heard my son's class was using coin flips to determine the winners and losers in the class's "stock market". Investing is not gambling!
Why are you mad? Your son's class is smarter than you, apparently. Or did you not know that the hedge fund managers being paid millions in fees can outperform monkeys throwing darts at stocks [automaticfinances.com] only 61 out of 100 times when tested? (That was run by the Wall Street Journal, by the way.) Or that the professional managers outperformed the Dow Jones Average index only 51 out of 100 times? Short-term investing certainly is gambling!
Re:Is it illegal? (Score:4, Insightful)
"Or that the professional managers outperformed the Dow Jones Average index only 51 out of 100 times?"
Since the DJIA goes up over time, on average, matching it makes money, over the long term. If a trader, high frequency or otherwise, is making money on average, he is participating in something that is very much NOT like a casino.
Fallacious logic. And the same logic that led mass hordes of people to think that investing in housing will ALWAYS make money on average. The OP supposes that actively investing is a skill set, and not based on random luck. Therefore, professional investors who have spent years training and being educated on investing should be able to consistently beat (A) monkeys throwing darts at stocks and (B) beat an index based on a LISTING of stocks, not on professional predictions of how well they're going to do in the future! They can only do (A) 61% of the time... and doesn't it worry you that they can't beat the monkeys 99% of the time? And they can't beat a LISTING of the biggest stocks more than 51% of the time!
So what happens when the index listings themselves come crashing down [wordpress.com]? I certainly hope you're not expecting those professional fund managers to exercise those wonderful "skill sets" and pull your retirement out of the fire...
Re: (Score:3, Insightful)
"Stock markets such as we have aren't absolutely critical to that, but they're pretty close."
Yes, but what you aren't taking into account is that Wall Street today isn't much about straight (or even legitimate) stock trading. Instead, it's money markets and derivatives, which don't fund capital projects. It all goes into fat cat pockets.
I wasn't deriding stock trading. I was blasting Wall Street. Two very different things.
Re:Is it illegal? (Score:4, Funny)
it is pure, unrestrained capitalism. What could possibly go wrong?
Well, if you look at the history of capitalism,
this will probably end with the USA invading another country over the price of bananas.
Monkey business I tell you, it's all monkey business.
Re:Is it illegal? (Score:5, Insightful)
I'm sorry but have you seen who's working at the Federal Reserve or the FDIC? Bankers and Wallstreet CEOs, that's who. The banks and the government are the same guys and the line between them is no more. Regulation? Hahahahahahahahh... what a quaint notion. We got here through Capitalism... because corporations want power and they can rig the government game in their favor. Its time for something completely different and I don't mean a penguin on the telly!
Re:Predictably... (Score:5, Interesting)
Re:Predictably... (Score:5, Informative)
This is totally correct. Most people now just locate whole junks of their algo platform in the same data center as the exchange (co-location). Once it's there, I've seen people questioning and arguing about minutiae such as which switch its connected to or length of ethernet/fibre cable vs competitors. Tiny fractions of a millisecond are very significant in this game. Then there's the kernel optimizations, assembly in-lining, FPGAs etc.
I think (probably unpopularly) that it's a bit unfair to brand these guys as 'hackers' implying that it's some sort of dirty word. Smart engineers will always find a way to make something faster, better, stronger. To think that people in finance would accept that things "have got fast enough now and we should just stop" is a bit naive. Why should finance technology be any different from any other kind of technology?
Also, bugs ARE of course there and is basic fact of having an imperfect model. These are pretty much immediately exploited in quite a Darwinian way by other market participants. This is why one model makes more money than an other. I'm not sure why the article's author thinks this is some kind of blinding revelation. Even in extreme examples such as during the flash crash, for every stupid model making disastrous trades, there was someone on the other side of each trade making a massive profit. Survival of the fittest, welcome to capitalism.
One final though is that people can't just 'hack' the exchange. Organisations like the FSA exist to ensure that each transaction that occurs is audited to make sure that it has a financially sound objective, not just gaming the system for weaknesses. Market participants can fined very significantly for getting this wrong.
This article is really just uneducated scare-mongering.
Re:Predictably... (Score:4, Insightful)
I think Mr. Cuban has a point.
The markets were originally meant to support businesses by allowing folks to invest so that companies could raise capital. Investors could then get returns in the form of dividends etc. Obviously, trading in stocks is an excellent way for folks to make money and this is fully supported by the market paradigm.
The problem with programmed trading at these levels is that it prioritizes arbitrage over the health of the companies the market is supposed to serve. It's a perfect example of the pendulum too far at one end.
Cheers,
Bruce.
Re:Predictably... (Score:5, Insightful)
Mr. Cuban has a point indeed.
It's exactly the same point that has been given by anybody remotely knowledgeable about software development ever since this high frequency trading started.
It's probably a similar point given by any economists who understands the concept of "long term".
Let's hope stock exchanges listen to a billionaire.
Re: (Score:3)
It's exactly the same point that has been given by anybody remotely knowledgeable about linear systems ever since this high frequency trading started.
FTFY.
Re:Predictably... (Score:5, Insightful)
The problem with programmed trading at these levels is that it prioritizes arbitrage over the health of the companies the market is supposed to serve.
Exploiting actual arbitrage opportunities would contribute to the health of the market itself, surely! But what makes you think that is what trading bots are doing? Aren't they simply scalping miniscule price movements at extremely high frequency?
I think that Cuban is wrong when he dismisses arguments that high frequency traders are providing markets with liquidity, clearly they are. And I think that software bugs in trading programs would sound primarily in reduced profits for their operators. However, I think he is correct to be concerned. As trading is increasingly conducted on the basis of tiny price movements without any regard to the underlying equities, and that at higher frequency and quantity, markets are being exposed to mass phenomena and feedbacks which have the potential to dislodge the performance of equities from the underlying performance of the actual companies, perhaps to disastrous consequences.
Re:Predictably... (Score:5, Insightful)
I think that Cuban is wrong when he dismisses arguments that high frequency traders are providing markets with liquidity, clearly they are. And I think that software bugs in trading programs would sound primarily in reduced profits for their operators.
*Cough* - Remember the flash crash? If anything, it showed that HFT is the market. Trading volumes have grown exponentially since derivatives and HFT went mainstream. It's not going to end well.
Plus, how HFT screws casual traders is absolutely abject. Joe wants to sell X for $9.99, Jack wants to buy it at $10.01. Instead of letting Joe and Jack do their trade normally, allowing Joe to pocket an extra $0.02, the algo (which is located at the market maker's premesis, to get the info in advance) discovers Joe's price by issuing tiny trades, and buys at $10 from Joe. It then immediately sells to Jack at $10.01, discovering his price in the same manner. People should be running around with pitchforks over this.
Re: (Score:3)
The previous way of doing things involved a specialist taking a minimum of 12 cents on every share traded. That was sooooo much better!
Re:Predictably... (Score:5, Insightful)
Quo vadis?
I get that if an arbitrageur who performs the classic arbitrage of buying a stock on one exchange and selling it on another where it's trading at a higher price is effectively connecting willing buyers and sellers who would agree on a price if they all had access to a common exchange. I also get that arbitrages on derivatives make the prices of related securities more internally consistent (not necessarily better, just more consistent).
What function does HFT serve in the market? The common answer I've heard is that they provide liquidity, that is, that they provide counter parties for trades that other people were looking to make, but if they exit that position within milliseconds by making the reverse trade to someone else, that means they only acted as a middleman between two willing parties that would have found each other in a short time anyway. I don't see how you can provide liquidity without having an openended commitment to sitting on an open long or short position the way a traditional marketmaker does. So how does this HFT provide liquidity that wasn't already there, and if it isn't providing that, what useful function is it serving?
Re:Predictably... (Score:5, Informative)
Look the purpose of the stock market is to facilitate the trading of securities. The societal good of that is that it frees up and allocates money to companies that are producing more value , or doing it more efficiently. This is a way to reward smart companies and incentivize new technologies.
This shit has nothing to do with any of that. They're gaming the system for a purpose to which it was never meant to be put and further, they're endangering everyone else while they're at it. Those are just the facts.. none of that was my opinion.
This is where Citizen United matters a lot . Romney is promising to re-Bushify the stock market if he gets elected. That means Wall Street is going Romney. That means huge sums of money are being poured into his campaign and if he wins , the market stands a good chance of cratering the economy again.
Greed has located a positive feedback loop and is exploiting it in a predictably greedy fashion.
The thing is, this is obviously reckless and has nothing to do with free markets. It's as if we threw away any concept of a social good except the servicing of the impulses of richest greediest people our society can produce.
Greed is an innate flaw in human thinking under most circumstances. It's not some magic rocket fuel that impels society towards greater wealth and innovation. That's a bullshit narrative told to you by drug addicts who don't want to be separated from their drug . And nothing more.
The thing is, the fanaticism on the right is also in a positive feedback loop with the right wing noise machine. Even though their economic deregulatory policies cratered the economy, they are taught how to deny that fact by the right wing noise machine. This clears them to vote more of the same into office.
We've effectively turned our economy over to people with a a group of compulsive gamblers and risk junkies. This is a completely different thing than supporting risk taking entrepreneurs.
Look societies live, grow and die. They die because they become captive to an entrenched minority who games the social cultural political system and secures for itself some positive feedback loop that reinforces their power and permits them to write the rules of society to their personal, narrow advantage. Thenceforward, at every decision point, their local, short terms needs are serviced first and in our case, almost exclusively.
We may be living in a dying society that will catastrophically implode . Our refusal to address global warming in more of the same dynamic with the oil and coal companies finding a positive feedback loop in their campaign contributions and right wing noise machine.
Citizen's United matters more than you think. SCOTUS overturned a hundred years of hard won lessons about politics and money and democracy this week in their Montana decision , which is nothing more than en extension of their Citizen's United decision. This from a political wing which claims to abhor the ideologically driven, no-nothing meddling of Big Government into the policies of the States and of business and other boots-on-the-ground forms of hard won, real world knowledge.
Money isn't speech and corporations aren't people. These are two more -in-your-face patent absurdities that future generations, if there are any, will laugh out loud at in middle school classes and serve as the Cliff Notes on Why America Collapsed 101.
You have to understand that rational thinking and reasoning about even the basic, obvious facts of the world does NOT come naturally to people. As proof of this I offer a recent story about an ongoing cause for mass murder in Africa- Penis Shrinkage Through Sorcery.
I 'll link to the Reuters story because otherwise you might suppose I am accidentally reporting satire.
http://www.reuters.com/article/2008/04/23/us-witchcraft-idUSN2319603620080423 [reuters.com]
Long story short, m
Re:Predictably... (Score:4, Funny)
"Greed is an innate flaw in human thinking under most circumstances. It's not some magic rocket fuel that impels society towards greater wealth and innovation. That's a bullshit narrative told to you by drug addicts who don't want to be separated from their drug . And nothing more."
Bingo. Greed is manifestation of survival instinct, hyperbolised by emotions and feelings and "know how" around in your society. How it come that most greedy people are from societies who are created by people most in need? Because they are *afraid* to go where they once were. Hunger and feeling of being poor and misarble is something what kicks survival instinct into berzerk mode. US was created by poor but determined people to live better. Determination isn't bad in it's case, but overlooking wider implications of despair and our instincts, thinking that only they matter, is problem. Problem is that people who learn to live this way usually also fuel their positive loop that they can't be wrong with fully trusting their survival instinct.
Free Speech and de-regulation (Score:4, Interesting)
Citizens United v. FEC has nothing to do with corporate personhood. That concept has been around since the late 1800s.
"Congress shall make no law ... abridging the freedom of speech"
A law which prohibits an organization from running a TV ad about a politician is a clear violation. Remember, the SCOTUS doesn't "legislate" or weigh the predicted results of the decision. They interpret the Constitution, and they made the right decision.
Financial de-regulation is a red herring. The politicians want you to believe deregulation was the problem for a multitude of reasons. First, the people that did it are long gone so there's nobody to vote out. Second, it gives the appearance that no laws were broken, and third, the fix is easy. More regulation. It's BS.
Government has at least 4 agencies specifically to regulate the financial sector and the FBI to investigate. They have all the regulations and evidence they need. The problem is that the feds literally will NOT enforce the existing laws.
"Money is Not Speech"
You guys DEFINITELY need a better meme. That statement is completely meaningless. IMO, it gives the impression that only word-of-mouth is immune from government infringement.
Re:Predictably... (Score:5, Interesting)
But the money isn't speech. The ad, pamphlet, etc is. Citizens' United decided that corporations had a Constitutional right to free speech. If they did have such a right, then it wouldn't be fair to limit their expenditures. But the obvious problem with that ruling is that corporations don't - and shouldn't! - have a right to free speech.
Corporations have to be people so they can own things and we can sue them. That's a well-established legal fiction. But they don't inherently get any human rights because of that. I, and many-to-most other people, think that granting corporations human rights is a mistake. What's next - the right to bear arms?
Re:Predictably... (Score:4, Informative)
Re: (Score:3)
Smart engineers will always find a way to make something faster, better, stronger. To think that people in finance would accept that things "have got fast enough now and we should just stop" is a bit naive. Why should finance technology be any different from any other kind of technology?
But if that something is (more or less) "gaming the system", it's usually not leading to something desireable.
Re: (Score:3)
This article is really just uneducated scare-mongering.
Stock markets are for investment, not speculation.
Sub-ms speeds for trades implies algorithms are doing the trading, not humans, as humans obviously can't keep up at that speed - they set the algorithms in motion, but cannot control them except by unrolling deals (which happens a scary amount on our current exchanges after flash crashes etc). So the only people benefiting from this market 'liquidity' are speculators trying to take a share of each transaction by ending up in the middle, or manipulate the mar
Re: (Score:3)
It's easy to make money if your biggest trading mistakes were rolled back.
Trades should only be rolled back if the casino aka exchange screws up, not if the players screw up.
Live by the sword, die by the sword.
There was also a time when HFTs engaged in what was practically front-running (even if legally not considered front-running)- they
It's a man in the middle attack (Score:3)
Re:Predictably... (Score:5, Interesting)
Simple solution has already be proposed. Queue trade requests in such a way that a random delay is inserted. The delay will be negligible and go unnoticed for humans but it would definitely screw up milliseconds traders.
Re: (Score:3)
Wouldn't a HFT box work around the previous three suggestions by buying put/call orders?
Re: (Score:3)
An hour might be a tad overkill. I'm thinking that 1-5 minutes is reasonably human-scale.
Someone mentioned not letting machines do the bidding. I disagree. I don't have a problem with that, but, I do believe that the trades should be human-scale.
Re:Predictably... (Score:4, Insightful)
Re:Predictably... (Score:5, Insightful)
Re:Predictably... (Score:5, Interesting)
And we do have an idea of what's actually going on. Here's a detailed example of the recent Facebook IPO problems: http://www.nanex.net/aqck/3099.html [nanex.net].
Re: (Score:3)
actually, hft colo systems are NOT in manhattan. there are no exchange datacenters on the island because the real estate is too valuable. they're all in jersey. directedge is in "ny4", which is actually in secaucus (the stinkiest part of) nj. nyse is in mahwah nj. i believe bats is in weehawken nj (nj3 datacenter). nasdaq is in carteret nj.
so actually, colo isn't all that expensive because the exchanges are all in previously undeveloped swamp land. the problem, of course, is deciding which ONE exchange you'
Re: (Score:3, Interesting)
"If a bank needs to exchange dollars for Euros, what should they do? Call someone on the phone because they're afraid of competing in an electronic market?"
Getting a current exchange rate -- or making an exchange, for that matter -- are not the same things as HFT. Both are quite possible without any HFT at all.
Re: (Score:3)
Actually currency trading makes up a ton of the HFT. People just don't know about it. There are hundreds (thousands?) of machines around the world that do nothing but look for 1 USD => 0.65 GBP => 0.80 Euro => 1.001 USD. And all those machines will try to instantly trade in that clearing house making pennies till that fund holder is out of cash (seconds).
The benefit of all this is that the system will instantly correct that 0.001 diff to a zero and provide near instant liquidity for someone look
Re: (Score:3)
Re:Easy to be a critic, harder to suggest alternat (Score:4, Insightful)
Re:As an HF Trader... (Score:4, Insightful)
Bullshit...HF trading is just front-running by other means in the sense that they make profits because they have info about stock prices before other investors (hence the need for high speed lines and co-location). HFT traders make a profit... so they are taking money out of the system... not adding liquidity to the system. Typical bankers - they steal from you and try to convince you that they are doing you a favor.