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)
System is broken. (Score:4, Insightful)
Easy to be a critic, harder to suggest alternative (Score:2, Insightful)
People like to complain about algo trading and HFT without suggesting how they'd improve it.
Technology and money! Scary!
It is an open market. People use computers to participate now. There are very tricky engineering and social problems involved, but I really don't see anyone suggesting a better way to do things. 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?
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.
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.
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.
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.
Re:System is broken. (Score:3, Insightful)
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.
Re:System is broken. (Score:4, Insightful)
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:5, Insightful)
Re:Is it illegal? (Score:2, Insightful)
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....
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: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.
Re:Easy to be a critic, harder to suggest alternat (Score:4, Insightful)
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:Can you explain? (Score:1, Insightful)
Also, do we really want lower transaction costs? They might shave pennies or even dollars off a stock market trade, but if the point of the stock market is investment in a company (rather that shifting wealth around) wouldn't we want incentive to stay vested in a company?
The point of the stock market is trade not investment. Investors are only some of the participants in a market. The speculators and market makers are obvious trade groups that doesn't invest. But even if you like a lot of ignorant people out there, want to go out of your way to shaft speculators, etc, there's still the corporations that sell shares of stock on these markets. Higher transaction costs and longer required holding times mean that their stock becomes less valuable and riskier to hold.
But even if you just consider investors, the transaction costs eat into profits and make it harder to get out of a investment, if you need the money for something else.
The trouble with HFTs is they siphon money w/o adding value.
Nonsense. They provide liquidity.
They just seem to drive up the cost for real investors....
How? Seriously, how? If I place a limit order to buy a stock at $100, then it doesn't matter what the HFT players do, they can't force me to buy for more than $100.
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.
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.
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: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.
Re:Is it illegal? (Score:3, Insightful)
One way to end sub-second HFTs (Score:1, Insightful)
Make all trades and trade-cancel orders "pending" and have the trades actually occur no more often than a few times a minute, in batches.
The idea is that once someone makes a bid to buy or sell, the pending queue and countdown clock before execution begins. As others bid to buy or sell, the execution clock is reset. To prevent gumming up the works, if more than, say, 15 seconds has elapsed since the pending queue was last empty or if the number of pending orders is "too big" to manage, new orders are pushed off until the next go-around. Those with orders in the queue will have an additional second or two to cancel a pending trade, and this "cancel clock" will be reset after each cancellation. It's expected that the stock exchange themselves will impose a very small cost on both placing an order and canceling an order.
Once the cancel clock expires, a computer takes all the orders, bundles them up in a fair way, and executes those trades that can be executed and divides the proceeds up in a fair manner. While different people might disagree on what is "fair," it's expected that a given stock exchange will work with its major traders and listed companies to determine what "fair" is on that exchange.
This pace is still too rapid for human beings to play, but at least it gives program-traders who can't afford to be less than a few fiber-miles away from the exchange an even playing field.
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: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)
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: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:2, 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.
Re:Predictably... (Score:4, Insightful)
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: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: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:Is it illegal? (Score:2, Insightful)
"It certainly doesn't resemble a casino."
It most definitely does. But let me clarify a bit what I meant.
TRADITIONALLY, stock investment helped raise capital for large projects. (Which was also the reason for the formation of corporations: large projects could be funded that even rich individuals could not afford to undertake.)
But even given that, stock trading is still indeed gambling. There is no justification for calling it anything BUT. You put out your cash and hope it grows. But it may not. If you trade at random, given many transactions you should have about a 50/50 chance of staying even. BUT... just like a casino, there is a house advantage here too: there are usually percentages or fees charged for each transaction. So again, if you assume randomness, odds are you will actually end up in the red.
There is nothing about this scheme that differs from gambling. Not... one... single... thing.
And just as with gambling, corruption has been (is) rampant [readersupportednews.org].
But even aside from that, what I was getting at is: the majority of wall street investment today is in one or another form of derivative. And a derivative is, quite literally, betting on other people's bets. Unlike regular stock investment, it produces nothing, and does not finance production. It simply finances the financiers.
You can argue with me all you like about that, but it doesn't change the facts. For the most part, Wall Street today has very little to do with actual capitalism. Instead it has to do with Corporatism and Governmentism (which, put together, were defined by Benito Mussolini as "fascism"). There is very little resemblance, even superficially, to actual "capitalism" to be had there.
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:Is it illegal? (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:Predictably... (Score:5, Insightful)
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:Can you explain? (Score:3, Insightful)
Re:Can you explain? (Score:3, Insightful)
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.
And I'm not a HFT, just to make that clear. In fact, I work with a lot of people being put out of work by them.
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: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.
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.
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.