

Tell HN: Stocks are not a zero sum game and high frequency trading is great - arthurdent

Stocks represent distributed company ownership. Entrepreneurship (creating companies) has historically been positive value in aggregate.<p>The stock market is the aggregate of all publicly traded entrepreneurship.  Trading would be zero sum if and only if the value of that ownership is constant.  It is not.<p>A reasonable argument is that nobody knows what the growth rate of the market is and over short timescales it is kind of sort of constant, so you might as well think of it as so.  That response is really a knock against high frequency trading and not generally against dabbling in stocks.<p>[Most] High frequency trading and "investing" are basically the same thing on different timescales.<p>Value investing might be characterized as finding undervalued companies, purchasing them, then, as Ben Graham might put it, waiting for Mr. Market to correctly value the company.<p>There are flavors of HFT that aren't easily defensible, but much high frequency trading is basically the same as value investing, using a different definition of "undervalued", which happens to be measured in much smaller time intervals.
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erikpukinskis
Isn't "finding undervalued companies" fundamentally an infrequent activity? I
don't see how it's possible to assess the value of a company relative to
market price fast enough to make even 10 trades a day.

I would say High Frequency Trading is, by definition, not about value, but
about price only.

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arthurdent
_Isn't "finding undervalued companies" fundamentally an infrequent activity_

I guess I don't understand why this is necessarily true. ACN supposedly might
have traded $.01 on the day of the flash crash (busted). It rallied back after
the fact. It was likely undervalued at $.01. If such price behavior were to be
an annual, monthly, daily, or hourly occurence, it'd probably still be
considered a mispricing of the stock. My position is that "correct" valuation
(if such a thing exists) and frequency are entirely independent.

 _I don't see how it's possible to assess the value of a company relative to
market price fast enough to make even 10 trades a day._

i think you're making a comment about the _speed_ at which valuation occurs.
without sounding too obvious about the answer, computers are really fast at
running numbers (not trying to be rude). there are all sorts of ways of
valuing companies, even in the traditional space of "value investing".
[http://www.fool.com/investing/beginning/how-to-value-
stocks-...](http://www.fool.com/investing/beginning/how-to-value-stocks-
introduction-to-valuation-meth.aspx) gives 5 broad methods to start. if there
were a method that involved only objective numerical data, then that valuation
could occur continuously throughout the day.

 _I would say High Frequency Trading is, by definition, not about value, but
about price only._

I think the 2 are necessarily related. When Value = Market Price, the issue is
fairly/correctly priced. When the two diverge, there is an opportunity. High
frequency trading is concerned with finding issues that are underpriced with
respect to the "true value". So in that sense, I think High Frequency Trading
is certainly about price, as is "long term value investing".

[Collecting rebates and high frequency trading don't so much apply to the
claim i'm making here]

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adn37
> [Most] High frequency trading and "investing" are basically the same thing
> on different timescales.

Yes, it's basically the same if you take out all the differences. Nothing said
so far.

Also, investing is clearly not the only activity on markets (speculation,
arbitrage, you name it), so let's not over simplify things.

Interesting reflection field, though.

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damoncali
HFT is _not_ the same as long term investing. Being able to see orders before
they happen makes it fundamentally different.

~~~
arthurdent
flash orders is actually the main thing i was referring to when i said _"There
are flavors of HFT that aren't easily defensible "_

a whole lot of HFT has nothing to do with seeing the orders before they
happen.

"high frequency trading" encompasses a lot of different strategies (just like
"computers" is a large and varied field).

imagine a high frequency strategy that finds mispriced securities, and trades
them. as it happens, these trades tend to converge very quickly. would you
consider this "fundamentally different" from long term investing (in any way
other than the holding time horizon, which the agent can't possibly know
before the trade actually realizes)?

~~~
damoncali
Yes, I would. The definition of "mispriced", I would argue, is quite
different. You could come up with all sorts of algorithms to trade in the
midst of a bubble, and find "undervalued" companies on micro time scales. In
the value investor's mind, the same companies are always overvalued. Value is
relative in one case and absolute in the other.

Splitting hairs perhaps, but the fundamental approaches are different. I will
give you that the hf mentality can certainly be applied over long time
periods.

~~~
arthurdent
define: mispriced = "value != market price"

Where you and i diverge is _"Value is relative in one case and absolute in the
other."_

I think you're saying that HF Guy's definition of value is relative and Value
Guy's definition of value is absolute.

If its even correct that any company has a single true value, I think this
number is unknowable. Investors or traders make estimates of this value, and
if their estimate deviates significantly from the market price, they transact
with Mr. Market.

Nobody's estimate is more absolute or relative than any one else's.

edit: deleted a bunch of pointless words.

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adamtmca
Who said it was a zero sum game?

