
Putting the Brakes on High Frequency Trading - elfinlike
http://www.nytimes.com/2012/10/02/opinion/putting-the-brakes-on-high-frequency-trading.html?_r=0
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raymondh
This article is long on inflammatory language and short on analysis or
evidence.

There are plenty of real issues with HFT as currently practiced (front-running
data feeds, gaming with flickering orders, dark pools, etc). However, the
article ignores these real issues and suggests that liquidity itself is a bad
thing (or something not worth having).

Liquidity means having the ability to transfer an asset quickly with minimal
loss of value. Anyone who invests wants a liquid market -- illiquid securities
are notoriously problematic.

The article is misleading. It is the absence of liquidity that is a disaster.
Market crashes are what happens when liquidity dries up. Just ask anyone who
was trying to sell their house last year.

As long as the rules are fair (no front-running, preferential trades, equal
access, etc), every market participant adds value. Markets are auctions and
auctions run best when there are active bidders.

~~~
krickle
It's fake liquidity IMO, since HF traders are only willing to take a position
inbetween someone selling at one price and someone buying a bit high. The
trade was going to go through without them in the middle. They are just
skimming some money from the buyer, who would otherwise have a lower price at
the cost of delaying a trade for half a second.

~~~
tumult
As a high-frequency trader, I can tell you right now that you are just
completely incorrect. I'm staring at a screen right now where we take both
sides on every order, not 'skimming some money' from people. It's obvious you
have no idea what you're talking about.

I would apologize for harsh language, but I have low tolerance for people who
freely speak lies of matters of which they know nothing.

~~~
krickle
If you aren't making money from having the majority of your trades inbetween
two trades you are necessarily losing money. But HFT is profitable for you,
which is a contradiction.

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dlauer
I would like to say that I was misquoted in this op-ed. I have never said that
"high-speed technology was “a destructive force in the market” with “no social
benefit.”" I said that there is a limit to the benefit of speed, and we're
finding that the latency race to 0 has found that limit.

~~~
elfinlike
I believe this is the entire quote: "The new electronic marketplace has
several structural inefficiencies. These are what have permitted HFT to become
a destructive force in the market, rather than a passive liquidity providing
mechanism. This should not be construed to say that all HFT is bad, but there
are 2 important points to make – the structural inefficiencies present in the
market have created a massive misallocation of resources into technology that
provides no social benefit, and structural deficiencies in market structure
have allowed for nefarious or accidental actions to disrupt the market". I
agree there are some contextual problems with the citation in the article.
Retrieved from
[http://banking.senate.gov/public/index.cfm?FuseAction=Hearin...](http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=f8a5cef9-291d-4dd3-ad3b-10b55c86d23e&Witness_ID=e514e57c-14e7-4a29-b75d-e5531e6b1cff)

------
dave_sullivan
Is there really a problem here that's worth regulating?

They point out flash crashes as being a big problem--those flash crashes
quickly correct themselves back to their "true" value (whatever that means),
and the people most hurt are the people who were using bad algorithms and took
risks they didn't understand, Knight Capital being a recent example.

They reference volume being much higher than it ever has been on account of
hft, which is true. But what does that have to do with the bubble of the 90s?
Higher volume != stock market ruin.

Then there's the small time investor getting hurt. But are they really? The
whims of the market now occur because of algorithmic trading as opposed to
before, when the whims of the market occurred because of--who knows? Small
time investors have been winning and losing since the system was invented.
Markets can and always will be fickle.

So again, what exactly is the problem here?

~~~
gergles
You have 100 shares of FOO. It is trading at $50. You bought it at $40, so you
have a stop-loss order to sell it at $35. Some "liquidity provider"'s
algorithm goes haywire and the price drops to $30. The exchange's "circuit
breakers" halt trading or revert the trades, and then the price quickly goes
back up to $50.

Unfortunately for you, your brokerage's computer saw the price drop, executed
your stop-loss order, and put your shares up for sale, which were then
purchased by another 'liquidity provider' (or hell, maybe even the same one
that caused the value to drop in the first place). You've now lost $1500
because of HFT. _Your_ trade can't be reverted, because fuck you, that's why,
but the holy "market makers" get their trades rolled back so that their rich
friends don't suffer anything for their alogrithmic fail.

~~~
pash
The real problem is that your "stop loss" is a standing order to sell, _at any
price_ , if the price of your asset falls below some threshold. That is
fundamentally a bad idea, and it's just this sort of trading behavior that
creates liquidity crises.

~~~
damoncali
No, the real problem is that one person's program broke and caused real losses
for other people who were acting rationally. If you must account for a non-
zero chance that some geek's algorithm will go totally batshit and lose you a
bunch of money in unpredictable ways, there is a huge problem at the very core
of the marketplace.

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fleitz
Who cares if institutional _traders_ can't figure out why the price is moving.

All traders do is arbitrage, computers are much better at spotting arbitrage
opportunities than humans are. That institutional traders can't figure it out
merely points to their irrelevance.

Now, on the other hand what we should be concerned about is if HFT is ruining
the investment climate and since companies rarely offer their stock it almost
certainly has no effect on the investment climate which looks at the macro
conditions across years rather than the microclimate of the next few minutes
as traders do.

The price of a stock, or the value of an index at any point in time has almost
no relevance to the economy as a whole. What matters is that over long periods
of time these companies deliver great value to their customers.

Lets worry about GS, et al, selling stock that doesn't exist (naked shorting)
before we worry about HFT.

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aleyan
For every trade you will incur some transaction cost. You may think that even
though there is a Bid and an Ask price, you may on average get somewhere in
the middle, but you don't. Your buy trades are likely to be filled on the Ask
price and your sell trades are likely to be filled on the Bid price because
some intermediary will get in between and pocket the spread. This has been the
case, this is the case, and I haven't seen viable solutions to this what so
ever.

What has changed over the past decade is who that intermediary is and how much
of the spread they can steal. In 2001 New York Stock Exchange reduced the
minimum listed price increments from $1/8 to $.01 . This spread used to be
collected by exchange "specialists" with inherited seats on the floor for
providing liquidity. The rise of alternative exchanges and computers allowed
third parties to cut in to provide liquidity with smaller spreads and cutting
out the specialists. These third parties are high frequency traders.

Investors are still loosing the spread on each trade they make, but it is so
much less than it used to be. There are issues with the market microstructures
that could be addressed, but trying to push computer generated should not be
it.

I for one, never want to go back to the dark days of specialists and their
$.125 and $.25 spreads.

PS. This was a discussion of the minimum transaction cost you can have.
Additionally you may have to pay fees to your broker ( especially if you are
retail and don't trade a lot ). If you are trading lots of shares at a clip
you will also encounter costs from the market impact of your trades.

------
raintrees
Or, implement Mark Cuban's 10 US cents per trade cost idea.
<http://news.ycombinator.com/item?id=2862003>

No more problem. And it could be harder to game than taxing profits after the
fact...

~~~
rdm70
Unintended consequences alert: read up on the UK stamp duty on UK equity
trades. Goldman Sachs creates a derivative security matching the return of the
underlying equity that you can trade with GS and avoid paying the stamp duty.
Net result: GS makes money, less liquidity for the average investor. Rock on
transaction taxes.

~~~
moe
_Goldman Sachs creates a derivative security matching the return of the
underlying equity_

So Goldman Sachs is using a loophole, how surprising.

What is your point, though? Should we not make laws that can potentially have
loopholes?

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niggler
As with most things, this addresses symptoms and not the actual underlying
problems. HFT have exposed all kinds of problems which existed since the
inception of the various markets but only appeared recently.

For example, Regulation NMS is an important rule that was introduced to solve
a major problem (ensuring price fairness in a decentralized environment) but
it didn't make sense back then. However, given the physical constraints, the
problems weren't apparent. Now HFT has highlighted the broken nature of the
regulation. The right solution is to force a re-centralization of the
exchanges, but instead of that people are pushing to stop HFT.

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zacharyvoase
I'm happy that there seems to be some discontent here on the substance of this
article. Indeed, we perceive market 'crashes' to be negative, but in fact they
(necessarily) benefit as many people as they hurt. Being able to obtain stock
in a company for fewer US$ can be a good thing. And who's to say that banning
algorithmic trading will prevent rapid swings in the market? They happened
before algorithmic trading was here, and they will happen afterwards.

All of this rhetoric seems to be a knee-jerk reaction to something the author
is incapable of grokking (no doubt due to a limited human capacity to do so).

~~~
krickle
HFT crashes do not benefit or hurt anyone, since they are rolled back.

~~~
zacharyvoase
I'm almost certain this statement is incorrect.

1) Just because a price reverts to a previous value does _not_ mean that no-
one benefited or was hurt from the fact that it fell or increased in between.

2) The 'rolling back' of an HFT-prompted crash (the causal link being
debatable anyway) is not guaranteed at all.

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tvladeck
Want less emphasis on speed? Let tick marks be less than $0.01. Market-makers
are clearly willing to provide spreads of less than $0.01. Any time the price
of something is artificially moved out of market equilibrium, there will be
queueing (either to buy or sell the good). In this case, there is queuing to
provide liquidity, and market-makers have every incentive to try and jump the
queue. Instead of competing on price (they can't), they compete on speed.

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tsotha
I don't see the point of worrying about volatility. The price moves and people
don't know why. So what? I don't care if traders get heartburn - that's part
of the job.

The real problem with HFT is its basic unfairness. Firms that aren't
physically located near the exchanges are at a disadvantage, as well as
individuals located anywhere. I like Glenn Reynolds' idea of adding a
randomized delay of up to one second to every trade.

~~~
damoncali
Volatility is reflected in value, which I suspect you care very much about.

~~~
tsotha
I'm not sure what you mean by that. What I care about is how my asset does
over the long run. If it goes up 10% today and down 10% tomorrow, I really
don't care.

