Have We Hit Peak HFT? 476
CowboyRobot writes "There was a time when people wanted the fastest networks so that they could trade at lightning speeds. They deployed the smartest formulas at trading venues where no one could know who was asking for that big block of stocks on the other end of the deal. It was a wild time and people made a lot of money along with some very unwise decisions. Wall Street seems to be acting out the lyrics to a Don Henley song. The party's over, the hangover is raging and no one really knows what happened the night before. The number of shares traded via high-frequency trading are down and politicians want to roll out a tax to serve as a speed bump. Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio want a .03 percent tax on nearly every trade in nearly every market in the U.S. Some are wondering if microsecond dealings are poised to fade away. As the founder of HFT firm Tower Research Capital Mark Gorton puts it, 'The easy money's gone. We're doing more things better than ever before and making less money doing it.'"
Re:The profits have been competed away (Score:4, Informative)
Re:Good (Score:5, Informative)
then why not tax per volume traded?
It *is* taxed per volume. 0.03%, which it nothing for a normal transaction. But for someone who buys and sells the same stock a hundred times per day, just to profit from tiny fluctuations in the stock value, it's 3%. This will kill the ridiculous business of racing for fastest connection and smartest trading algo, which is *good* because it is a ridiculous and useless business.
Re:Good (Score:5, Informative)
Jim has an apple. He calls out, who will give me 50 cents for this lovely apple. Jon likes apples so he heads over. Just as he raises his hand to call out, flash the wonder trader bumps him into the gutter and buys the apple from Jim (even though he hates apples). He then offers it to Jon for $51 cents.
Not only is that rude, but eventually you'll get popped in the nose for it.
Re:Good (Score:3, Informative)
Unless they are deliberately giving away an endless stream of money, that is literally impossible.
This from the person that doesnt even know that there is a difference between bid prices and ask prices. It is only within this difference that the HFT's can make a profit, and they can only do so if they reduce that spread.
Until you have an argument that acknowledges that there are two prices, we can only presume that you dont have any clue at all what you are talking about. For the record, the amount of peer reviewed research on the subject [google.com] is legion. Perhaps instead of declaring it impossible, you should educate yourself instead of just being a denier.
Re:Good (Score:5, Informative)
buying 100 million shares in london and immediately selling the same in tokyo to exploit a 1 ms diffrence in ping that causes the price to be 0.01 different in both locations to eek out a tiny bit of profit that was NOT DUE TO ANY ACTUAL CHANGE IN STOCK VALUE BUT DUE TO PING TIME.
buying a few thousand shares at a time and immediately canceling the buy order in order to fish out normal trader's sell limits (which are hidden and theoreatically secret from the buyer) in order to remove them from the market
multiple HFT caused viscious cycles that cause the market to be extremely volatile and nearly crash...
seriously, if you need it explained in this day and age, you're just a troll or a shill for an HFT company.
Re:Good (Score:5, Informative)
a 0.03% isn't a tax per share it's a tax on the dollar value of the final trade when executed - whether it's one share at $100,000 per share or 100,000 shares at $1 per share, the tax would be the same. There'd be no incentive by anyone to favor more expensive shares over cheaper ones.
Re:Good (Score:5, Informative)
http://en.wikipedia.org/wiki/2010_Flash_Crash [wikipedia.org]
The joint report "portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral," that a large mutual fund firm "chose to sell a big number of futures contracts using a computer program that essentially ended up wiping out available buyers in the market," that as a result high-frequency firms "were also aggressively selling the E-mini contracts," contributing to rapid price declines.[12]
The joint report also noted "'HFTs began to quickly buy and then resell contracts to each other — generating a 'hot-potato' volume effect as the same positions were passed rapidly back and forth.'"[12]
The combined sales by Waddell and high-frequency firms quickly drove "the E-mini price down 3% in just four minutes."[12] As prices in the futures market fell, there was a spillover into the equities markets where "the liquidity in the market evaporated because the automated systems used by most firms to keep pace with the market paused" and scaled back their trading or withdrew from the markets altogether.[12]
The joint report then noted that "Automatic computerized traders on the stock market shut down as they detected the sharp rise in buying and selling."[40] As computerized high-frequency traders exited the stock market, the resulting lack of liquidity "...caused shares of some prominent companies like Procter & Gamble and Accenture to trade down as low as a penny or as high as $100,000."[40]
While some firms exited the market, high-frequency firms that remained in the market exacerbated price declines because they "'escalated their aggressive selling' during the downdraft.
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Boom. Headshot.
Re:Good (Score:5, Informative)
High frequency traders like to say that they are helping the markets by providing liquidity. THat's false - it's fake liquidity. They're not market makers who must post bids and asks at all times, it's fake liquidity that's only there when its convienenty. As soon as there's a spike or crash, that liquidity vaporizes. Same with your bids and asks that you're pointing out - a HUGE percentage of HFT orders are cancelled within microseconds of being placed - those bids and asks might look like they're there, but most of the time, they're not there at all.
High frequency trading is one of the few activities out there that trully provides zero benefit for society, and in fact creates expenses that the rest of us have to pay for. Exchanges need to beef up their computer systems in order to handle all the volume that could be unleashed by the HFT crowd; that's an expense that's getting passed on to all of us, not just them. The extra liquidity promises are false. And the whole system can fall apart and wreak havoc, either on the markets as a whole or to participants, just due to shoddy programming (think flash crash, think Knight Capital). Meanwhile, it prevents real price discovery from occuring, no one can discerne which bids are real bids by interested investors versus which ones might disappear the second you try to fill them.
I'm sorry. I'll defend derivatitves, hedge funds, mortgage backed securities and nearly anything else in the capital markets, but high frequency trading is not anywhere on that list.
Re:Good (Score:4, Informative)
There is certainly an argument as to whether market makers are really required but, in practice, if they're not there, then I can't see how there can be any more trust in the stock markets than there is trading in ebay. It's essential that when I buy I know that the stocks will be delivered and when I sell I know that I'll be paid.
That has nothing to do with market makers. The safeguard is the clearing house.
Re:Good (Score:2, Informative)
Something you (and the Senator's proposal) have forgotten is that you can use HFT to manipulate the market without actually holding the stock at all.
Many of the recent HFT driven market surge/crashes have not come from actual trades, but by the market being flooded with millions of orders which are cancelled almost as soon as they are issued (before anyone can act on them.) This may be an arms race between algos, or two algos creating an unintended feedback loop, or it might be an occasional "raid" by market manipulation when the conditions are right. But it also shows that the pricing is increasingly being dominated by false asks/offers.
So the HFT tax needs to be levied against asks/offers themselves, not against the subsequent trades. That would also specifically punish HFTs without hurting big institutional traders, or small home day-traders.
Re:Front Running (Score:-1, Informative)
TIPS? HA HA HA HA HA HA HA HA! TIPS are for people who are looking for safety and yet they are jumping from a pan into an open fire. TIPS are nonsense, they are tied to the official measure of inflation, which is complete nonsense, real inflation is higher by an order of magnitude than what the government pretends it is.
Also in the worst case scenario (hyperinflation and the inevitable depression) you'll get some of your nominal dollars from TIPS but dollars won't have any value.
AFAIC it's much safer to be in foreign currencies than in USA dollars or bonds and it's better to be in foreign stocks than in companies that mainly derive their revenues from sales in USA.
Also it's much better to be in real money (gold) than in any fiat currency, because they are all following the same self-destructive pattern of behaviour because the entire world is an interconnected Keynesian hell, but at least in countries that are productive you can own productive assets and ride out the problem.
Oh, and in case of a hyper inflation it surely is safer to own property than dollars, at least you'll have the land, but don't buy residential, that shit is very overvalued, buy useful land, farm land, mines, land with water wells, something like that.
Re:Good (Score:4, Informative)
Front-running is a separate issue, which can happen and has happened at every trading rate. It's esentially analogous to insider information about trades, and it's illegal. It has nothing per se to do with HFT. HFT is only responding to apparent differences between value and price at a higher rate than regular trading, and using volumes to make up for the relatively small differences involved. The result of HFT (now that the bubble has burst) is just to smooth out the ripples - the 'quantum noise', if you will. I'm not sure we're down to that level of detail yet - but the minimum price difference in a given currency, e.g. 1 cent in US trading, amounts to the 'quantum of money', so there is likely to be a continuous random fluctuation of +/- 1 cent, and a bit less fluctuation of +/- 2 cents, and so on. 'Quantum of Money' would make a great book title. :)
Re:Good (Score:4, Informative)
No, the alternative is what existed before HFT - If Jim wants to sell an apple, and Bob wants to buy an apple, Jim must sell it to someone with a seat on the exchange who will extract 12.5 cents per share on each side of the trade.
HFT effectively put the traditional market-makers out of business by providing liquidity at fractional pennies per share rather than taking 1/8th of a point per share on each end, but people bitch about how unfair it is because microseconds or something.