Fantasy share deals with *real* consequences .
And I'd say the answer to the question "How dependent are big
gamblers banks on high speed trading is "very"
Automated "predatory" robot bankers caused a number of serious glitches that sent the global financial system shuddering to a halt, researchers have claimed. Boffins from the University of Miami found that squadrons of "ultrafast" and out of control trading algorithms caused major spikes and crashes in the market. These …
It's not like the bots are manufacturing money, or creating any real wealth. The only way for them to accumulate real money (and what else are they for?) is to insert themselves as the middleman in any genuine transaction and steal money from one or both of the ends of the desired transaction.
They need to be fast to get in ahead of any transactions representing actual interested parties.
The solution is both very simple, and utterly doomed: Require a nominal, but real, fee for every bid or ask submitted to the market. Say $0.001 for the sake of argument. A real person trying to sell a block of shares may need to ask 10 times - cost $0.01 - to get a matching bid. Even on a discount brokerage fee, $0.01 isn't worth worrying about. But one of these bots trying to game the market will make tens of thousands of bids (or asks) a second. That would then cost real money, on the order of millions of dollars per trading day per bot.
Boom, no more bots.
I like it!
Maybe if something like this were to occur, then we vast unwashed could reenter the system with the reasonable belief that the game isn't rigged against us. (Remember the old saying: If you are in a card game, and you can't recognize the sucker, the sucker is you? Well, welcome to the card game that is the NYSE!)
Of course, I dream, 'cuz the fatasses that control the game also control the rule-makers (read: Congress, Parliament, whatever). And I think we all know how that movie ends....
How is it rigged against you by these algorithms? As a human you are not going to be doing microsecond speed trades, but how does the fact that these guys do in any way 'rig the game' against you? If you want to buy a stock you offer a price you are willing to pay. If someone is willing to sell it to you for that price then the deal is done. If someone very fast knows they can buy the stock for a price lower than your offer and sell it to you and pocket the difference you still get the same deal.
The fact that these algorithms exist will close that price gap since both sides now know more: the better they are at it the less they can take off the middle. Either way you still got what you wanted for the price you were willing to pay. When you come to sell said stock you offer it for a price you are willing to accept. Again: it doesn't really matter if some HFT algo in the middle buys it from you knowing it can sell it for a small amount more.
You can happily do your meatspace trading with your knowledge of the longer term trends in pricing, and not make any less money from it than you would if the algo/HFT traders weren't there. The only difference is that there would likely be less liquidity in the market, and bigger bid/ask price spreads to contend with.
I knew someone about eight years ago who'd spent the previous five years writing their own algorithm to do this type of high-speed arbitrage trading.
Sunk a ton of his own money into it while he was developing and refining the mathematics (way beyond my ability to understand).
But made a ton of money on it, because it's spotting the low buys and the high sells and executing the trades before the human traders do the same.
Then he made even more money by selling the algorithm to some private investment fund somewhere.
Don't know what he's doing now - probably sitting on a beach earning 20%...
So, the race is to get your better / faster system trading before the other guys beat you to it. So how long (even if it's not already the case) before the test regimes get pared back so far that a cockup is almost inevitable? After all, when did 'if I test for this, it might avoid a catastrophe' ever trump 'if you put this out now instead of next week, I'll make a shitload of dosh'?
But we've already had screw-ups due to bad/non-existent testing. That's why we had the flash crash, stocks dropping based on a Twitter feed, etc. I have read articles about the hardware behind this stuff. Simple rules running on intelligent network cards is what is being used. The cards repeatedly poll for updates as fast as they can, and then do a rule lookup. That's all there is to it. The host OS simply updates the rules every so often.
What worries me is that while better safeguards _could_ be built into the algorithms, they aren't because it would take another couple of milliseconds.
The other mystery is why the exchanges (or governments or regulartory bodies) don't put a stop to it by building in a 1-second random shuffle buffer to their transaction processing. Or is it that there needs to be (another) global catastophe before any action is taken...
No mystery there. Where do you think the governments, regulatory bodies, and so on get their money from? Who do you think they're answerable to?
With regards to regulatory bodies it's the opposite problem - not enough money and not enough experts. Regulatory bodies suffer from a particular type of brain-drain.
In that they hire fairly inexperienced or average types to investigate bankers books; then after they've gotten some experience, banks will swoop in with offer of a salary the government can't compete with, and hire these experienced regulators to help them find ways around new regulations.
It's a lovely parasitic relationship. Anyone looking for a high paying job in banking should get a job in a regulatory organisation.
The question that is interesting to me is what stock markets are for?
If they are about providing capital to companies then there really is no place for high frequency trading in them and maybe something like a Tobin Tax or a turn-based market of some kind would help to limit their antics. If they are about creating an interesting and entertaining computer game where different algorithms play against each other then wicked, sounds like this is just the thing!
Buying and selling (whether shares, bonds or derivatives) within 24hours should be regarded as gambling and taxed accordingly.
There could be a choice of electing to pay tax on the purchase price or paying on the difference between buy and sell prices. somewhat analogous to the betting shop, but you always pay, whether the price goes up or down.
It's all flimflammery anyway. Government feeds the monster in the first place, then turns around and pretends to regulate it.
You know exactly who will write the law and who will be holding the bag.
Salon had a commendably non-progressive take on this for once:
Unless, as a competitor, you possess enough capital to jump in with both feet and with force, you’re destined, by overwhelming odds, to be on the wrong side of a flash trade, dark pool, regulation induced arbitrage. Not enough money to play and too much regulation to prevent competition. These are mutually exclusive, anti-competitive constructs to the marketplace. In the aftermath of financial bubbles and meltdowns, it has become politically fashionable to grow government with more uneducated and inexperienced personalities charged with blind hatred towards anyone working on Wall Street. Adding legislative mob mentality driven by populist demagoguery into a toxic market can further economic and productivity loss from a couple of years into decade long cycles. Hence, unmeasured and uncertain ideological sword brandishing can succeed in further adding collateral damage to an already broken system. And while it may sound like an argument that is counter-intuitive – hire more intra-country, counter-party traders and eliminate regulation. It remains important to be able to differentiate fraud from purposefully productive and openly competitive markets.
In their rush to reduce reaction times so as to beat the competition, they're creating an avalanche effect. Everyone reacts to the same bit of news, but since their reaction times are so low, and since completing the transaction involves some small but (relative to the reaction time) significant delay (due to the speed of light if nothing else), no one knows if they got it or were beat until it's too late to stop it. It's like ten hands reaching into a small bag for the last treat. Since everyone wants the treat badly and everyone thinks they're first, the inevitable result is at most one person with the treat and a blown out bag. The worst part is that this is a SURVIVAL INSTINCT meaning it'll keep happening again and again. I suspect if we try to curb the behaviour they'll just find a way around it: survival of the fittest will trump just about anything.
But there are too many bags for that to happen, and more keep on coming every day. Part of the HFT's job is to FIND the bags...FIRST. And when a trade tales MILLIseconds, every NANOsecond counts. This is "first in wins" taken to inhuman extremes.
As for the idea that a transaction fee will stop HFTs, given that the companies with the capital to build and operate an HFT routinely operate with billions of dollars at a time, any kind of non-exorbitant transaction fee would likely be absorbed by them as The Cost of Doing Business. And beyond that, suppose these companies decided to end-run around transaction fees?
This sounds a bit like playing one chess computer against another. Great fun when you're a kid, but when you realise what the banks are doing could wipe out a lot of people's pensions and savings on a whim then it would appear that this is not a good application of technology.
I'm all for technology providing information and even suggestions to meat sacks, but ultimately it needs to be the meat sack that makes the decision - for worse or for better. To allow the tech to bypass its water logged operator and make its own decisions is ultimately going to result in bad things and consequences that have not been considered.
I'm not a great fan of this automated trading malarkey as I see it as removing the decision making process from us, and it's us that should decide, not some lump of unsentient silicon.
Ah but the illusion is that is is us who are deciding, because that lump is making the decisions "we" programmed into it.
A fallacy, of course, because the lump is just processing virtual ones and zeros that happen to have an impact on our economy. The lump doesn't even know what it is doing.
I have a fantasy that, one day, we do finally invent AI. And, when we tie AI to everything that we do, it stops working. When we ask it why, it just answers "get a life".
Maybe a touch pedantic, but it's generally not banks doing this, it'll be hedge funds.
The 'too big to fail' banks are pretty much out of prop trading ( gambling their own money, and by own money i mean your money ) and are largely client facilitation services.
Hedgies, being privately funded, get what ever they can scrape together themselves. If they go down the shitter, we dont bail them out.
I think kinda more scary is the move from hft microcrashes to low touch automated trading on the fixed income instruments,which trade in million dollar sized lumps. Game one of those correctly and you could do some real damage to a large investment bank.
Standard disclaimers apply, 2nd std dev, etc
... and the first true ai's (if/when someone ever builds one) will probably be either be these market traders or military, and not philosophers or scientists. I, for one, do not welcome these new (albeit hypothetical) overlords, because they are are unlikely to consider our interests very relevant. Still maybe we could intimidate them with the power of interpretative dance?
A few years ago I was called in to make alterations one of these things by a company that leased the software to traders. It took something like six weeks or more to make relatively minor changes because the thing was fussy. I remember them being very concerned with the speed of the thing. At the time, I thought their concern was misguided since my understanding of the market was that human beings were making trades on a floor and a few seconds should not make any difference. Little did I know.
I am still unconvinced that you can beat random walk, but I would not bet my own money on that :)
"I am still unconvinced that you can beat random walk, but I would not bet my own money on that :)"
Once you've realized it is best to use other people's money, you're already well on your way to being a broker!
If you can some work in some sort of substance abuse type high risk behavior and be able to look at a tree or a woman and see dollar signs instead of leaves or tits you'll know you've made to the big leagues!
Short team, random walk can be beaten, i saw it happpening at a major swiss bank ( check out 'The Predictors',cracking booking, cracking bunch of people ) - statistical arbitrage, mean reversion, etc. I'm no rocket scientist and i managed to get within a day of their model's positional direction change using just price tick data and came up on the right side.
However, to steal the tagline of arch tinfoil wearers ZeroHedge, on a long enough timeline the survival rate for everyone drops to zero. Market irrationality will go against you, you'll introduce a bug, data will be corrupted, planes will fly into large immovable buildings, etc,etc
Have fun, play nice
Perhaps it's time to create another market, one designed to be used by people/machines with no interest in the world inhabited by people who provide tangible goods and services?
The trading described here bears no relationship to the organic rationale for public offerings. Mixing abstractions such as high-speed trading with fundamental requirements such as producing foodstuffs is risky.
The fact is that it is the cost of a transaction that allows these high speed traders. If they had to spend 1cent for each trade then the speed crashes would stop. The creators of these programs are relying on the ability to trade at high speed for almost no cost.