HFT Nothing To Worry About (at Least In Australia) 152
angry tapir writes "Although software-driven high-frequency trading has got a pretty bad rap (being blamed for the so-called 'Flash Crash' in 2012 for example) Australia's chief financial regulator ASIC says that, in Australia at least, it's not cause for concern. After an in-depth study of HFT in Australian markets, ASIC decided to hold off on previously considered regulatory changes (such as implementing a 'pause' for some small trades)."
Sometimes I think *de*regulation is the answer (Score:4, Interesting)
I think the opposite would actually work better.
If the official rules stated "HFT is totally *un*regulated --- feel free to run your buggies, most insane, glitchy, and flawed HFT software" --- immediately all the other HFT software systems would be coded to watch for crazy non-justified buying&selling.
With all this regulation, if one bank's trading software starts going insane, the other banks start following them (and creat a positive feedback loop) under the assumption that in such a regulated industry the insane software must know something. If it were further de-regulated, the other software would assume the other software was poorly coded, and basically LOL at the bugs and profit from it until someone pulled the plug on the bad algorithm. And with that risk - I imagine a *lot* of interested would be in automating such plug-pulling checks so they happen in a very small number of miliseconds so the market can't crash too far before the kill switch hits.
Re:Screw The Big Traders (Score:3, Interesting)
Thing is that is a GOOD thing.
You are creating a fake surplus.
Lets say person one sells for X.
Person two wants to buy for Y.
In the normal world X and Y would meet at price Z somewhere in the middle. X walks away with a little less (or more) money. Y ends up paying a bit more (or less) than they wanted but not much.
Now lets put a middle man in the mix. The middle man will buy at X if X lessthan Y then turn around and sell at Y to the other guy and pocket the difference. So Y ends up paying more than the market would really bear and X gets a little less than the market would really bear. Both buyer and seller are in effect screwed in the deal. The only one who wins is the middle man.
This has the effect of over inflating the real true market value by on average abs(x - y)/2. Now do that several billion times per day.
HFT is not about liquidity. It is about pocketing the difference because person 1 does not talk directly to person 2.
Want to know what squeezed out the margin? The internet. People can more closely see what is going on at a much faster pace. So the difference between x and y is much smaller.
Re:HFT (Score:5, Interesting)
Things like 1% management fees and high expense ratios on 401(K)s (which can end up costing you 3/4 of your retirement money), combination life insurance/savings plans (almost always a ripoff), and more specific to day-traders, things like how the AP sells early access to hedge funds, insider trading, that type of thing. I would argue that even the ads on CNBC trying to convince people that they can make money day-trading qualify as a scam. Also, see this video:
http://finance.yahoo.com/blogs/daily-ticker/yes-markets-rigged-survive-shark-infested-waters-143233110.html [yahoo.com]
Re:Screw The Big Traders (Score:4, Interesting)
I do actually appreciate the value HFT brings to liquidity as a market maker. When I trade, I want to use a limit price rather than a market order, and see my orders filled within 5-10 minutes so I know if I need to adjust my price before I go to work or whatever; trading small-cap stocks I appreciate that it doesn't work quite this way in all markets.
What I have a problem with is the other games that HFT plays with algorithmic trading. Edging out arbitrage on a narrow buy/sell spread is much different than playing momentum with fast trades to disrupt the market for financial gain.