

Is algorithmic trading making markets less efficient & gaming the system? - landist
http://www.themistrading.com/article_files/0000/0348/Toxic_Equity_Trading_on_Wall_Street_12-17-08.pdf

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z_
Having read this white paper the general impression I get from the authors is
that they are unhappy about automated market traders exploiting other poor
algorithms. In essence this is five pages dedicated to,"Entity A has better
algorithms than we do, this should be illegal because we don't know how to
compete."

If you can identify the bubble, you can make money. These guys have figured
out how the game works now they need to exploit it, in the name of free market
capitalism of course.

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nowtown
Well said. Though given the stupidity of their examples, I would not bet on
these guys to write any winning trades any time soon. Better to cry foul and
scam a few buy-siders into buying their snake oil.

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tptacek
Cute:

 _To illustrate, let’s use an institutional algo order pegged to the NBBO with
discretion to pay up to $20.10. First, the predatory algo uses methods similar
to the liquidity rebate trader to spot this as an institutional algo order.
Next, with a bid of $20.01, the predatory algo goes on the attack. The
institutional algo immediately goes to $20.01. Then, the predatory algo goes
$20.02, and the institutional algo follows. In similar fashion, the predatory
algo runs up the institutional algo to its $20.10 limit. At that point, the
predatory algo sells the stock short at $20.10 to the institutional algo,
knowing it is highly likely that the price of the stock will fall. When it
does, the predatory algo covers._

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known
3 ways of making profits in secondary markets for an Individual Investor.

    
    
        Insider-Trading
        Invest via IPOs
        Mutual Funds

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ohgrayt
machine trading has been in heavy use for a decade. a little late to wonder
about its efficacy now

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smokinn
When it's just a tiny percentage of the overall trades, it doesn't really
matter.

As Goldman Sachs is now proving though, it can be wildly profitable. What
happens if it eventually becomes the dominant form of trading? What does the
stock market then represent? Surely not the value of a company, based on
research and bets on the future. Doesn't it just become a high speed game
where computers try to steal pennies from each other?

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cellis
Ahem. Please don't attribute Goldman's success to _trading_. Goldman Sachs
recent "success" is largely due to them adroitly navigating the political
waters of the bailout, without which i suspect they would be in serious
trouble.

As for machine trading or stat-arb, high freq, whatever...i don't think it is
any better than a random walk. Risk was (is?) just being hidden somewhere and
lied about.

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eru
Not necessarily. E.g. arbitrage is really risk-free.

~~~
cellis
Frictionless arbitrage?

~~~
eru
No. You need to find enough of an arbitrage opportunity to overcome the
friction. But once you found it, it's a risk-free profit. (You can't do too
complex an atomic transaction on the financial markets; but most arbitrage
deals take much less than a day --- even less than a few minutes, so your
window of exposure is quite short.)

