

Clamping Down on High-Speed Stock Trades: US, Canada, European regulators - gtani
http://www.nytimes.com/2011/10/09/business/clamping-down-on-rapid-trades-in-stock-market.html?hp

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karzeem
It's supposedly regulators driving this crackdown, but almost all the quotes
in the article come from _competitors_ to high-speed trading firms claiming —
surprise — that high-speed trading firms need to be regulated.

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yuhong
Not that they don't have a point, of course.

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jkahn
Stocks should only be allowed to trade at the speed that value is created or
lost. The stock market is a human institution, (supposedly) designed to
measure value of human businesses.

Trading in microseconds is ridiculous.

Trades should be in human time - essentially, minutes and hours, not seconds
and microseconds. Business value does not change that quickly. HFT is
representative of a financial industry set on creating ever more abstract
tools and products that are more akin to gambling than representing the value
of the actual business. The stock market needs to return to it's roots.
There's been enough chaos already.

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feral
First off, business value can change quickly.

Sudden events happen. You can think of dramatic events such as terrorist
attacks or death of an important executive; but there's other information,
such as the public announcement of a new product (e.g. 'Apple are making a new
type of device!', perhaps rapidly followed by 'Google have just said they'll
support it!') that also result in fast changes.

But, most importantly, the market price provides information that influences
further decisions. Maybe I'm not an expert on oil prices, but I believe if it
goes below $70 a barrel, its a signal that the world economy is slowing down,
and I want to dump my Google stock, because I'm only willing to accept a
certain level of risk in my personal investments.

The fact that I can see the price of the oil provides me with a signal (maybe
noisy), derived from aggregated intelligence of other investors. This is a
useful function.

Its completely legitimate to want to sell my Google stock in response to other
market signals, and as quickly as possible, in response to the new information
they provide.

The fundamental value of holding the Google stock, to me, has changed, fast,
because of other information that's become available.

So fundamental business value can change fast, for a variety of reasons, and
it can add value to be able to respond to quick changes quickly.

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jkahn
_Perception_ of business value can change quickly. Actual business value
itself does not tend to change so fast. Dumping your Google stock if oil drops
below $70 per barrel is solely based on your own perception and your own
trading rules. The value of Google's products remain the same. If a competitor
releases a new device, that is based in human time.

Does it make a difference if you sell at 12.01pm after a competitor's product
announcement rather than 1pm? Right now, yes. Do I think it should? No.

The reason prices swing so quickly is because trades happen so quickly. If
trading was slowed down, prices would not swing as quickly. The current
situation reinforces a vicious cycle where the fastest trader has an advantage
in the market.

Public share prices is a measure of _how much the company is worth to people
that buy shares_ not of how much value the company creates by selling their
products. PepsiCo should be valued on how well they sell soft drink, not
millisecond-by-millisecond analysis of unrelated issues.

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hendzen
There is no such thing as 'actual business value'. The very definition of
value is based on perception; something of value is something people want. The
closest concept I can think of to what you mean is "book value", which comes
with its own set of drawbacks.

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VladRussian
it isn't even a crude/primitive AI, it is just algorithms that are let loose
for a limited periods of time in a limited activity space - and humans are
already feeling threatened(xenophobic) as this algorithmic trading feels
completely unnatural. (The reason of fairness is complete BS because
professional traders have always had informational and speed advantage, it is
just that it was on the human scale - seconds vs. minutes, and now it crossed
into non-human microseconds scale)

Well, welcome to the 21st century. The algorithmic trading will look like a
child play when in the "drone arm race", the sides would be forced to delegate
final shoot decision to the drone algorithms for exactly the same reason -
human speed wouldn't be enough as the millisecond advantage makes the critical
difference between wining and loosing. That would be a reason to feel slightly
xenophobic i guess, though we'll possibly get used to it :)

Wrt. unfair advantage vs. investors not utilizing this advanced tool of
algorithmic trading - whole human history since the time of apes is just a
continuous sequence of "slow" humans being ruthlessly overtaken by other
humans taking [unfair like any advantage] advantage through better tools and
weapons. We're direct beneficiaries of such an unfair advantage and, as we
aren't the ultimate goal, just an intermediate point in this history, we'll be
a victims of it in due course of that history.

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huhtenberg
Here's your +1 to get you out of gray area, but WRT "Wrt. unfair advantage"
you should really read up on HFT in detail. _All of HFT_ is based on the
premise of getting an access to the order flow a split second sooner than
everyone else. To get such access HFT firms pay very hefty fee to Nasdaq and
other exchanges. That's where the unfair advantage is - not in the use of
computers, but in an exclusive access to the information that not even all
banks can afford.

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MKT
everyone can purchase fast access. If a brokerage or a bank wanted to do it,
they certainly could. It's like saying that Kinko's has an unfair advantage at
making copies because it bought expensive copiers and regular folks have not.

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joezydeco
I'd say it's more like Kinko's discovering you want to make some copies...and
quickly erecting a store right outside your house so you stop there instead of
Staples.

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MKT
and what's wrong with that? Or rather, would you ban that too?

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joezydeco
Yes, because that key word... _discovering_...implies that our rhetorical
Kinko's has somehow gleaned advance knowledge that you're about to leave home
to purchase some copies.

I don't think HFT in general is ruining things. I think the ability of HFT
firms to quickly enter orders and quickly widthdraw those same orders
_millions of times a minute_ enables them to gain some insight into the
trading market that the market was never designed for. And I believe _that_ is
a perversion of the original open-call trading that the stock market was built
upon. All buyers should be able to see the ask at the exact same time.

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jacoblyles
What's the harm in HFT? It certainly increases liquidity in the market, making
it easier for other investors to enter or exit a position on short notice.
That's a good thing.

Let's not fall pray to generalized anti-finance populism without good reason.

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tzs
My suspicion (which I can't prove--this is just a gut feeling) is that there
is an economically correct price for any given thing, and that markets will
move toward that price. This economically correct price only changes when
factors in the "real world" change, or we have reason to believe factors in
the real world are going to change (e.g., bad weather might reduce crop yield,
or forecasts of bad weather make is expect a reduction in yield).

Actors in the markets get information not only from real world sources (e.g.,
news reports), but also infer information from the activity of other actors in
the market, so there is a bit of a feedback look in the market.

My suspicion is that as you increase the frequency of trades, starting from
very infrequent (e.g., people trading in person directly with the person they
are buying or selling from) and then going to faster and faster methods
(trades by mail, then telegraph, and so on), there are two effects. First, the
market is able to more quickly converge to near the "correct" price for the
item, and there is some increase in fluctuation around the correct price due
to strengthening of the feedback loops.

I suspect that there is some optimum trading speed, which depends on the rate
that the real world events (things like weather changes, fashion, wars, and so
on) happen, and when you push trading speed past that you stop gaining on
convergence speed, but continue increasing instability due to the feedback
loops.

The result is a market that is less and less tied to the real world. In
effect, the market ends up _making_ _up_ information from the trading activity
itself. The trading essentially ends up being based on noise rather than
signal. It's hard to see how that can be good.

~~~
MKT
trading activity is information because it is real people putting real money
at risk and expressing their views of what the assets are worth. As in any
competitive market, HFT traders cannot make money if they only trade with
themselves - that is a mean zero proposition. But by trading with people who
price the assets incorrectly at a point in time, they help move asset prices
to their "correct " levels

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sireat
I keep saying that one of the biggest problems with HFT is the false illussion
of at will liquidity.

This is what happened at the "flash crash", many traders providing liquidity,
which included most of HFT scene getting out of market, because they (and
their algorithms) decided it was not worth the risk.

Old market makers did not operate like this, they were providing quotes even
in a very volatile markets. Of course, many lost their shirts doing so, but
were obliged by the exchanges to provide this service.

If none of the liquidity providers have an obligation, then we have no
liquidity in volatile times, when we need it the most.

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MKT
yes but if there is an obligation, you could end up with less total liquidity
because if you oblige traders to trade when it is a losing proposition to do
so, you will get less traders and less liquidity all the time, including
volatile times. That's why exchanges actually pay traders to provide liquidity
and charge liquidity takers. Imagine if you ordered convenience stores to sell
twinkies to people even if they have no money. How would that work in practice
?

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known
HFT =
[https://secure.wikimedia.org/wikipedia/en/wiki/Algorithmic_t...](https://secure.wikimedia.org/wikipedia/en/wiki/Algorithmic_trading)
\+ <https://secure.wikimedia.org/wikipedia/en/wiki/Front_running>

_Front running is illegal._

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pnathan
All I read was "Oh noes, the computer, we don't understand it".

I would suggest that the people involved take the time to understand and learn
the new branch of their art, instead of calling it "unholy", as if was some
evil device by the antagonist of $religion.

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Bud
Gosh. You mean allowing billion-dollar-poker by professional gamblers who have
a six-orders-of-magnitude speed advantage over regular investors, and are also
indemnified against any and all losses, might be dangerous? I'm shocked. Truly
shocked.

No fucking duh. If ANYONE with any power were serious about fixing society or
the world economy, this shit would be banned. Yesterday.

