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The Almighty Buck

Have We Hit Peak HFT? 476

Posted by Unknown Lamer
from the if-that's-what-you-call-economic-collapse dept.
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.'"
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Have We Hit Peak HFT?

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  • Good (Score:5, Insightful)

    by clickclickdrone (964164) on Tuesday June 18, 2013 @05:08AM (#44037301)
    HFT is a symptom of a deeply broken system. We need to really start to recognise that profit isn't all and long term stewardship of our instituitions and systems is key to our long term quality of live. For everyone.
    • Yeah, I think so too, therefore it should be MUCH higher than 0.03%.
      • Re:Good (Score:5, Insightful)

        by Anonymous Coward on Tuesday June 18, 2013 @05:31AM (#44037343)

        It's 0.03% on everything, not just HFTs, so it has to be small. The intent is to tax people who make money on trade volume rather than on trade value, which is a larger issue than just the speed at which trades are executed.

        • If the intent is to tax people on trade volume, then why not tax per volume traded?
          Geez.

          • Re:Good (Score:5, Informative)

            by SlashV (1069110) on Tuesday June 18, 2013 @05:59AM (#44037431) Homepage

            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: (Score:2, Insightful)

              by Rockoon (1252108)

              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.

              That is not a reason to consider it "good." Essentially you are saying "I dont like how he makes money, so lets punish him"

              For it to be "good" there needs to be a positive effect. Please explain what the positive effect is, because I dont see it. I see the HFT offering bids and asks that are better than everyone elses .. how is discouraging better prices for both buyers and sellers a good thing?

              Seriously.. explain it to me without resorting to a hatred. Explain to everyone why it is that when they get

              • Re:Good (Score:5, Informative)

                by sjames (1099) on Tuesday June 18, 2013 @07:29AM (#44037773) Homepage

                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.

                • by coofercat (719737)

                  Or to put it another way...

                  Jim has an apple. He calls out "who will give me 50 cents for this lovely apple". Jon likes apples, so heads head over. Just as he raises his hand to call out, Flash the Wonder Trader runs down to the market, buys an apple for 30 cents, comes back in and says "I've got an apple for 45 cents". Jon buys his apple for 45 cents, and Jim is left with his over-priced apple rotting on his desk.

                  I'm not saying HFT is all good, but it does some positive things for you, the little guy (Jon i

              • Re:Good (Score:5, Insightful)

                by TheDarkMaster (1292526) on Tuesday June 18, 2013 @07:33AM (#44037793)
                Is good. HFT distorts the purpose of a stock exchange, the idea of having shares in a company to help it to capitalize, make it succeed and you earn a share of the profits in return. A company needs partners (the shareholders), not parasites.
                • but the shareholders are the parasites. the shareholders want to bleed the company dry of every ounce of profit for their own gain. the longer they hold the shares the more profit they expect and demand to bleed from the company. most even long term holders don't buy the shares because they care about the company, they buy them because they want to make money...same reason as the HFT's only on a different timescale.

                  the company on the other hand really doesn't care if the shareholders are long term. if t

              • Re:Good (Score:4, Insightful)

                by gbjbaanb (229885) on Tuesday June 18, 2013 @07:50AM (#44037865)

                there was an example of the broken financial system on the news last night.

                Basically Guinea (IIRC) has some mountains that are 60% pure iron, so the (allegedly corrupt) dictator of Guinea gave the mining rights to an (allegedly dodgy) mining company.

                Said company then didn't bother to mine the iron, instead it used the backing of having a huge iron asset to make trades on the markets and made a load of cash that way. Meanwhile the people of Guinea are dirt poor with no hope of even getting jobs digging said iron out of the ground for 10p a day, let alone seeing the extraction of the iron benefit the country's economy.

                This is one way of seeing why a financial market that does nothing but deal within itself is a bad thing. If we changed focus so stock markets were tied to something in the real world (eg Microsoft profits, or Apple growth) no matter how tenuous, that you held for some time because of that real-world item's worth wrt the stock then we'd see stock markets become more investment based and less trade based.

                We might as well base the stock market on TV shows - you could trade on the love life of some TV character without any difference with how financial companies trade today.

                • there was an example of the broken financial system on the news last night.

                  Basically Guinea (IIRC) has some mountains that are 60% pure iron, so the (allegedly corrupt) dictator of Guinea gave the mining rights to an (allegedly dodgy) mining company.

                  Said company then didn't bother to mine the iron, instead it used the backing of having a huge iron asset to make trades on the markets and made a load of cash that way. Meanwhile the people of Guinea are dirt poor with no hope of even getting jobs digging said iron out of the ground for 10p a day, let alone seeing the extraction of the iron benefit the country's economy.

                  This is one way of seeing why a financial market that does nothing but deal within itself is a bad thing. If we changed focus so stock markets were tied to something in the real world (eg Microsoft profits, or Apple growth) no matter how tenuous, that you held for some time because of that real-world item's worth wrt the stock then we'd see stock markets become more investment based and less trade based.

                  We might as well base the stock market on TV shows - you could trade on the love life of some TV character without any difference with how financial companies trade today.

                  That is a problem with the mining contract (and possibly the corrupt dictator) - not the financial system.

                  • And you are a douche.

                    See how I did that? I made a statement like it was a fact. It's not a problem with my statement though, probably a problem with the lack of a truth filter on this forum software. A technicality so to speak.

                  • by Qzukk (229616)

                    not the financial system

                    The "financial system" allowed them to claim iron underground as a valuable asset even if there was no plans or way to monetize it. The people giving this company money on this basis done fucked up, pets.com style, no matter how you look at it.

                    If the "financial system" is there to separate fools and their money, then it's working as designed.

                • Re:Good (Score:5, Insightful)

                  by dpilot (134227) on Tuesday June 18, 2013 @08:24AM (#44038049) Homepage Journal

                  I like what you've said, but let's phrase this in a simpler, more basic way.

                  Once upon a time, I thought that the stock market was supposed to be a mechanism for investing in companies - a way for them to generate money to fund their real-world growth. I suspect that some of that is still happening, but from what I can see the stock market has largely turned into something else.

                  To me, these days the stock market looks more like a sanctioned gambling parlor. Even IPOs, which one would think of as the ultimate in funding growth of a new company, are at least partially viewed as a way for the founders to cash in. (or out)

                • by DarkOx (621550)

                  Except it really isn't the problem you think it is. The people of Guinea in your example will be dirt poor no matter what. If there was real value in extracting the iron someone would do it. The fact that its not being extracted means in real terms there are cheaper sources of iron sufficient to meet demand. If someone started extracting the iron, now the price would just fall through the floor. To keep the operation going wages for minors would be even more depressed, and the local would most likely h

              • Money doesn't get created out of thin air. If HFT firms are making money, other investors are losing exactly that money. For example, patient investors who have put a limit order in and are waiting for someone to take it. They'll be consistently below the "improved" price and their order never gets executed.

                No matter how you try to explain it, the HFT profits are coming from other investors' pockets, the stock market is not magic.

                HFT improves liquidity? That sure explains all the mini-meltdowns we've seen r

                • All that means is that HFT implements the 'efficient market with perfect information' more rapidly and correctly - which is a good thing. It means that prices for all goods in all markets are more likely to be close to their 'real' clearing price, regardless of vendor or currency.

                  Note that when you as a small retail investor buy or sell any reasonably well-traded stock through your broker, such as Schwab, you are no longer actually putting an order on the floor of the market - you are dealing with the brok

              • Re:Good (Score:5, Informative)

                by dywolf (2673597) on Tuesday June 18, 2013 @08:12AM (#44037963)

                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)

                by dywolf (2673597) on Tuesday June 18, 2013 @08:27AM (#44038071)

                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.
                --
                Boom. Headshot.

              • Re:Good (Score:5, Informative)

                by um... Lucas (13147) on Tuesday June 18, 2013 @08:32AM (#44038097) Homepage Journal

                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.

              • There is a benefit that no one has mentioned yet: HFT can cause the market for a stock to oscillate out of control very, very quickly, and that oscillation can disrupt the trading in the stock. The "circuit breakers" the NYSE put in to damp out-of-control oscillations are pretty much defeated by HFT. Further, HFT disassociates the value of the stock itself from the perceived value created by short-term movement in the market, and so affects the capitalization of a company trying to do business. HFT is al
            • What concerns me about this method of controlling this is the compliance costs. Whenever there is a tax there are forms to be filled out, reports to be filed and audits to be done. Which frequently ends up costing vast sums of money. Well if these brokerages spend all of this money complying with a tiny tax to stop an undesirable behavior they are going to pass that on to customers. Now I personally don't do any stock trading. I do have a 401(k) plan at work that includes stock funds. Which make large trad

      • Even the 3 cents per $100 quickly adds up. It would kill liquidity and widen spreads. You're addressing one problem by creating a new and more damaging one.
        • by dywolf (2673597)

          normal traders dont trade volumes in the hundreds of millions of shares per day, nor do they trade at fractions of a cent per share difference.

          moreover, the speedbump should not just be on completed orders, since over hlaf of the HFT volume is buy and sell orders that are then canceled and never completed: the microtax should be on all buy and sell orders, even if canceled.

          that alone would stop the majority of the bogus HFT trading and restore vast amounts of confidence in the market while barely even regis

    • quality of *life*. Doh.
    • Re:Good (Score:5, Interesting)

      by gd2shoe (747932) on Tuesday June 18, 2013 @05:45AM (#44037397) Journal

      HFT is a symptom of a deeply broken system. We need to really start to recognise that profit isn't all and long term stewardship of our instituitions and systems is key to our long term quality of live. For everyone.

      Mostly true, but simplistic.

      HFT is a symptom of a deeply broken system. It brings liquidity, which is good, but it has tended to move the market in unreasonable (and sometimes dangerous) ways. So many trades today are HFT versus HFT that it obscures the real markets. We've seen several clear instances where computers are terrible at predicting the real market values when the primary data they're competing against are the actions of other computers. HFT doesn't lead to good price discovery, it obscures it.

      When talking about long-term stewardship of institutions, we really need to move away from unreasonable earnings expectations every quarter. When the focus of the market is on ever narrowing periods of time, corporations simply cannot properly invest in the future. Yes, some corporations are lead by unusual people who can leave market panic behind them and truly lead... but most companies are run by very smart idiots.

      Ultimately, stock/commodity/bond markets are about profit. There is nothing inherently wrong with that. The question for the rest of us is: what is the social value? Wall Street has some social value, but it also has considerable social expense. Sometimes we forget that. We also tend to forget that "the markets" are still based upon similar principles that brought us the great depression. Yeah, they're more sophisticated now. Yes, there are "regulations" (occasionally enforced). But the market CANNOT bring prosperity by ignoring it, and letting it run on its own.

      Stock/commodity/bond markets are not capitalism. They are merely outgrowths of one particular variation on capitalism. They're finicky, hard to properly balance, and break if you try to exert too much control.

      • Re:Good (Score:5, Insightful)

        by peragrin (659227) on Tuesday June 18, 2013 @06:26AM (#44037535)

        Something like 60% of the active volume of trades are HFT that is lasting less than a second. That isn't investing in a company that is gambling.

        The other problem is the economy is growing at maybe 1% a year and the entire stock market is doing 10-15% Sure some companies are growing that way but there is a major disconnect between how wall street is growing and the rest of the world. If Wall street is supposed to be about individual company profits how can it be growing so far beyond the companies that are represented in it?

        • Re: (Score:2, Insightful)

          by locofungus (179280)

          60% being HFT doesn't sound unreasonable to me.

          Given that market makers are, almost by definition, going to be doing HFT and there will be a market maker as counterparty to any investment trade, the "perfect" market would have 50% HFT matching buyers to sellers.

          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

          • Re:Good (Score:4, Informative)

            by ebno-10db (1459097) on Tuesday June 18, 2013 @08:37AM (#44038139)

            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.

        • The movement of share prices correlates strongly (0.8 - 0.9) with either the velocity or the acceleration in the level of margin debt. Share prices are growing because people are borrowing money to buy them. This isn't "real" wealth creation, and it isn't sustainable.
        • by gatkinso (15975)

          HFT is many things.. gambling is not one of them.

      • Re:Good (Score:5, Interesting)

        by Too Much Noise (755847) on Tuesday June 18, 2013 @07:04AM (#44037681) Journal

        HFT is a symptom of a deeply broken system. It brings liquidity, which is good, but it has tended to move the market in unreasonable (and sometimes dangerous) ways.

        That is a bit simplistic as well. First, stepping in front of a trade because you can (1) see it before the other guy (due to having lower latencies in talking to the exchange or having priority 'fast' data feeds) and (2) quote using fraction of a penny increments as opposed to pennies for the 'regular' guys is not adding liquidity. In fact, from the way flash crashes happen you can see exactly how HFT does not add liquidity with a stock/future going bidless and crashing. Properly supplying liquidity would not allow for something like that to happen.

        When talking about long-term stewardship of institutions, we really need to move away from unreasonable earnings expectations every quarter.

        Who is we? The short-termism here is the market speaking. The idea of markets setting the 'right' price is highly dependent on your definition of 'right'. As the saying goes, markets can remain irrational longer than one can remain solvent (and bet on rationality). Nevermind the fact that people in the market have different types of interests which are not always aligned to long-term value. See corporate raiders, LBO, and so on - case in point, Icahn.

        When the focus of the market is on ever narrowing periods of time, corporations simply cannot properly invest in the future.

        That's not entirely the problem. When the upper echelons of the corporations receive stock options with short vesting periods (no, 5 years is not long term compared to typical investment horizons, and 5 years are not really that frequent) the motivation to invest in the long-term future is basically absent. Also, there are industries where that is simply not possible, as the prevailing conditions fluctuate too much.

        Ultimately, stock/commodity/bond markets are about profit. There is nothing inherently wrong with that. The question for the rest of us is: what is the social value?

        Indeed, profit is the key word. Social value is incidental, if at all.

      • BY itself HTF is instant arbitrage that if it's done right assures that the market value for everything is precisely priced in terms of risk, rewards and aggregate demand at every instant. When that's true I can confidently buy a stock knowing it's not overpriced due to some off liquidity issue. And I can sell a stock knowing it's not underpriced for lack of liquidity.

        Arbitrage is a from of knowledge equilibration.

        Or in theory that's true. But what really happens is that if you jam enough noise into the

    • by stenvar (2789879)

      HFT is a symptom of a deeply broken system. We need to really start to recognise that profit isn't all and long term stewardship of our instituitions and systems is key to our long term quality of live. For everyone.

      HFT is a problem because it interferes with free markets: you can't have people make rational buying decisions within a few microseconds. But your second sentence has nothing to do with HFT. If you want to advocate an economy based on "long term stewardship", do so without erroneously linking it

      • by Smidge204 (605297)

        I don't see anything erroneous with the link.

        HFT is implemented by people. It is not autonomous and it didn't pop into existence by itself. It was created by humans with the short-sighted goal of maximizing profit with no consideration of the long-term stability of the system it's interfaced with.

        You are right that humans can't make rational judgements in milliseconds - that's why humans create machines to do it for them. Although I'd argue that humans have great difficulty making rational judgements no mat

  • by ebonum (830686) on Tuesday June 18, 2013 @05:36AM (#44037367)

    They would know that people who execute a lot of trades get big discounts. HUGE discounts. If you are doing more than 20,000 or 100,000 trades a month, you start to trade at a fraction of the cost of a normal investor.
    http://www.interactivebrokers.com/en/index.php?f=commission&p=futures3 [interactivebrokers.com]

    With this fee structure, a HFT can get in and out and make money. A normal trader would lose money on the exact same trade. For the average guy, the trade might be profitable, but the trade commission is greater than the profit. Exchanges give a lot of incentives to traders who bring big volume.

    I have a major issue with a system where two different traders make the exact same trade, but one loses money while the other makes a profit.
    I'm not suggesting eliminating the lower fees for more active traders. I would like to see the gap between the highest commission and the lowest commission close. This simple change would work wonders to level the playing field. If the highest commission was limited to 130% of the lowest commission, the high frequency traders would lose most of their advantage.

    • If the policy makers actually traded . . . they wouldn't be taxing it.

      • by Lumpy (12016)

        Policy makers do trade. They just trade on inside information and make 20%-50% gains on every trade. You are a peon so you have to rely on blind luck to get your .03% or on a good day 10%.

        Look at the reports, trading exploding 2 seconds before things being announced, etc... All of congress trades, they just have very different information and rules than you do.

  • by Bruce66423 (1678196) on Tuesday June 18, 2013 @05:37AM (#44037373)
    As economic theory would predict, the money that was being made by HFT isn't any more because more and more people are getting to play the same game. The virtue of HFT is the liquidity that it brings to the markets, but at the cost of possible software caused chaos, as we've seen on a few occasions. On the whole it's probably worth tolerating, because the alternative is likely to see 'regulation arbitrage' as players go round any new rules.
    • by gd2shoe (747932) on Tuesday June 18, 2013 @05:58AM (#44037429) Journal
      I believe we do need to address this somehow with regulations... but carefully. "Regulation arbitrage" is a very good term for the real complication here.
    • by wvmarle (1070040) on Tuesday June 18, 2013 @06:18AM (#44037501)

      Indeed HFT trades with HFT, there is no money in that. Or at least not much, as they all chase the same fractions of a cent.

      The flash crashes as I understand are partly caused by all HFT systems using essentially the same algorithm, and as a result movements amplify really quickly. If there would be several radically different decision making algorithms in the market this shouldn't be much of a problem, as wrong decisions by one are taken advantage of by another, so the other can make a profit (directly punishing the bad decision of the one algorithm), and such market movements are smoothed out.

      • by Zorpheus (857617)
        Why would flash crashes be a wrong decision for HFTs? I think they could trigger many stop loss orders of other traders, and in that way buy stocks for low prices.
        • What happens is that HFTs cause flash crashes by selling large quantity of a stock when the price drops below a certain threshold. So, what happens is that HFT Computer A interprets its data as a signal to sell all of its stock in Company Z. This causes the price of the stock in Company Z to drop below the threshold for HFT Computer B, which then unloads all of its stock in Company Z. A cascade is triggered and many (or all) of the HFT computers sell the stock of Company A. Most of the time the signal which
      • by coofercat (719737)

        Actually, Flash Crashes are as much a symptom of automated *slow* traders, like pension companies and such like. They make maybe one or two trades a week, they hold stock for a long time, and they (supposedly) do nice things for their customers (I personally disagree with that last bit, but I'd say people generally like pension companies, whereas they generally don't like HFTs).

        When a crash starts, the price of stock X drops below threshold Y which triggers many automated trading systems to dump the (large

  • It's only natural. (Score:5, Interesting)

    by Anonymous Coward on Tuesday June 18, 2013 @05:42AM (#44037391)

    If HFT is the latest shtick in "providing liquidity", then it really is arbitrage. And by its very nature, do enough of that and the opportunities exhaust themselves. In fact, the infrastructure built to support HFT improves access for other traders, too.

    I think taxes may not be necessary, and probably would do more damage than good anyway. The big trouble with HFT isn't the trade volume, but the "probing" volume, offers made then withdrawn so quickly nobody can take'em.

    I'm with the NANEX bunch on this; simply require that offers be good for a minimum timespan so that completely fake offers are unaffordable, for someone might take the offer. That saves the cost and administrative overhead of another senseless tax that hits far wider than the problem it purports to solve, but then doesn't.

    • by gd2shoe (747932)
      Mod parent up. It's not the only problem, or the only solution. But it does make sense, is fair, and doesn't harm legitimate market operations.
      • Re: (Score:3, Funny)

        by Rockoon (1252108)
        Ditto - Mod the grandparent up.

        The HFT's offer the best bids and asks (or else they wouldnt get any trades) -- there is nothing wrong with better prices for people looking to buy and sell -- really, there isn't -- it doesnt matter if some guy in the middle makes some money in the process - you are still getting a better price.

        Notice how most of the people that hate HFT's dont even understand the difference between bids and asks, and that often even the rare few that do show at least this minimum level o
  • Front Running (Score:5, Interesting)

    by ka9dgx (72702) on Tuesday June 18, 2013 @05:51AM (#44037407) Homepage Journal

    The main reason for HFT is to "front run" the market, to game the traditional customers of the price discovery mechanism, and make a risk-less profit. This dis-incentivises the market for everyone else, who see it as corruption and move their money elsewhere.

    The big picture though is one of a big liquidity event, in which the velocity of money [stlouisfed.org] is rapidly falling as everyone tries to save up enough cash to ride out the oncoming greater depression. The rapid printing of money is showing up in the 17% growth of the M3 Money Supply [nowandfutures.com], but is getting hoarded up by banks and corporations as rapidly as it's getting created. This is the only thing keeping inflation from at bay, for now.

    Once the Tsunami of dollars starts to find its way to main street, and chasing goods and services, an inflationary wave will hit us all, and we'll learn to get used to $10/gallon gasoline, and they start to remember it fondly not much later.

  • by Anonymous Coward on Tuesday June 18, 2013 @06:04AM (#44037457)

    The share tax in France and Italy doesn't affect us investors much. But if you're in to make a 30% return, you don't care about the 0.03%+0.03% buy and sell taxes anyway. It's only the traders, and they add nothing to the investment market, they're just skimming off some of the margin between buyer and seller.

    IMHO, the biggest problem with the stock markets is delayed quotes. The big guys have the real time prices, the small guys have a fake price, from 20 minutes ago. This is a big problem with European stock exchanges. How can you have a market if you're lying to people about the current prices?!

    That's what I'd like to see ended. The two tier price quote system.

    The stock markets make us little investors deliberately ignorant of the true price, they then sell that ignorance as 'real-time-quotes- to the big guys. They should be forced to charge one fee to everyone for the same quotes, and stop deliberately deceiving investors into the market.

    • by ebno-10db (1459097) on Tuesday June 18, 2013 @08:06AM (#44037941)

      The share tax in France and Italy doesn't affect us investors much. But if you're in to make a 30% return, you don't care about the 0.03%+0.03% buy and sell taxes anyway. It's only the traders, and they add nothing to the investment market, they're just skimming off some of the margin between buyer and seller.

      Thank you! I was going to to mention that the British tax doesn't seem to have killed the London Stock Exchange, but I wasn't aware that the tax also existed in France and Italy. As often happens in economic discussions (e.g. about health care) some people endlessly pontificate about what should happen according to their simplistic pet theory, and ignore the empirical evidence.

  • by Required Snark (1702878) on Tuesday June 18, 2013 @07:19AM (#44037741)
    HFT divides the financial universe into insiders and outsiders. The resources required to compete are beyond the means of any but the most sophisticated and connected organizations. Any system that requires low millisecond access to the data stream is overtly biased towards the few. If you think you can participate by buying stock in companies that do this and share the profit you are showing gross stupidity. It's just like making hedge fund money; by definition, anyone below the top .1% is locked out.

    Real world value does not change in millisecond increments, except for earthquakes and nuclear holocaust. Therefor the profit in HFT is extracted by decreasing value for non-HFC entities (that would be you). It's analogous to entropy.

    The value extracted by the insiders disproportionately degrades the system for everyone else. It's equivalent to oil production in the Nigerian delta. The people who live there have a horribly destroyed environment, and people far away make huge profits.

    HFT is vulnerable to mistakes and deliberate manipulation. Can you say Flash Crash? Remember, there is no real time way to tell the difference between a misbehaving algorithm and a deliberate market manipulation or a hostile attack. It's not even clear that you can differentiate after the event is over.

    Anyone with a shred of self preservation should be scared shitless by this situation. For Wall Street HFT is a sacred institution, and any attempt to reign in the abuse is treated as an attempt to defile a holy site. They own the casino, and given the centrality of international banking institutions, everyone is forced to bet no matter what.

    Wall Street types should be treated like meth freaks with rabies, because that's how they behave. They are actively dismantling the world economy for their own individual gain, and if they are not stopped there will be nothing left to save.

    • by coofercat (719737)

      Walmart (or large supermarket of your choice) divides the shopping universe into insiders and outsiders. The resources to compete are beyond the means of any but the most sophisticated and connected organisations... (etc).

      This is how captialism works - you start up, you make some money, you make barriers to entry (https://en.wikipedia.org/wiki/Barriers_to_entry) for other potential entrants to the market.

      I'm not saying HFT is all good, but they're not actually all-bad either. See my other comment above for

  • by gelfling (6534) on Tuesday June 18, 2013 @07:26AM (#44037761) Homepage Journal

    First off, politicians who claim that everything that ever will be invented has been invented is worse than retarded. Second, they're just looking for tax money. That's it. It's just about the money. If they could tax talking about taxes they would.

  • Tulip bulbs traded at the speed of light.
  • by ggraham412 (1492023) on Tuesday June 18, 2013 @09:12AM (#44038421)

    Critics of HFT say the smaller investors are out because they cannot compete against the HFT crowd even though most brokers offer their own flavors of high speed trade execution.

    That's not true, unless by smaller "Mom and Pop" investors the author really means semi-professional, day-trading arbitrageurs. I am a small time investor trying to make retirement savings grow by hunting for safe stocks with high dividend yields. What matters much, much more to me is that I can't get a decent interest rate on CDs or money market because of pro-Wall Street and pro-big bank FED policies.

    Why does HFT matter to me? It really doesn't. Sure, in theory some HFT algo is going to snap up bargains ahead of me, but they're also shorting the bogeys so I'm always going to get the fair price. Stop the FUD.

  • by the eric conspiracy (20178) on Tuesday June 18, 2013 @11:07AM (#44039513)

    Basically this holds that a large public market is information-efficient. That is the current market prices reflect all publicly available information.

    There are a variety of variations on this theme which mostly reflect the strength of the adherence to the hypothesis.

    My particular belief is that the semi-strong form of the hypothesis is probably the correct one. You may have temporary bubbles, and markets that have poor disclosure requirements can be inefficient; these disallow the strong form of the hypothesis.

    The main reason for the semi-strong being correct is that even market insiders with the best analytical tools are unable to consistently outperform the market averages. Most mutual funds, hedge funds, pensions and endowments actually underperform the market when trading costs are compensated for. Those that do outperform cannot do it on a consistent basis. There is no correlation between good performance one year and the next.

    The idea that the game is rigged and only insiders have a chance is provably wrong. An individual investor using minimum cost passive investing strategies and good diversification will consistently outperform professionally managed portfolios just because of the lower costs. Any advantages that deviations from EMH are too small to overcome the trading costs needed to take advantage of the inefficiency.

    Now that HFC trading is mature, it is showing the same efficient market behavior. It just isn't worth the costs because the market has wrung out any advantages of this mode of trading.

    http://en.wikipedia.org/wiki/Efficient-market_hypothesis [wikipedia.org]

  • by stenvar (2789879) on Tuesday June 18, 2013 @12:43PM (#44040723)

    HFT may sometimes increase volatility and sometimes decrease it. Overall, there is little evidence that there's a need to act.

    But a transaction tax means massive new reporting and data collection on every financial transaction. It probably would require data exchange between all major tax authorities, and the imposition of US rules on foreign financial markets. It also means that any transaction or contract will now have to come under suspicion of being a proxy for a financial transaction that might otherwise be a taxable trade.

    I can't figure out how anybody can at the same time get upset about NSA spying and then support such legislation. It looks like people won't rest until every paperclip purchase, every phone call, every trip, every e-book page read, and every bit of our medical information has been reported to the government and exchanged with governments around the world. Of course, each of these regulations has a separate group of people making excuses for them: "for the children", "for financial stability and fairness", "for anti-terrorism efforts", "for your own good", or whatever else excuse-du-jour people come up with.

186,000 Miles per Second. It's not just a good idea. IT'S THE LAW.

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