Hey, Michael Lewis: Stop DEMONISING Wall Street’s SUPERHUMAN high-speed trading Yesterday's energetic debate on CNBC between BATS Global Markets president William O'Brien and Flash Boys author Michael Lewis and IEX's Brad Katsuyama put the cat among the pigeons over high-frequency trading. It was all provoked by Moneyball writer Lewis' new book, Flash Boys, which, among other things, makes the claim that …
Ah yes - on Planet Tim, in spite of proof of LIBOR fixing, fx fixing, commodity price fixing, the wholly inexplicable banking meltdown (the one that everyone saw coming except the markets), and that whole thing with Enron and such, the world's trading houses remain paragons of virginal market purity, and there is no cause for concern - so go back to sleep and don't fluster your naive and ignorant little heads, it's all working as it should.
Just how stupid does this person think we are?
Oh, LOL, now explain what all of these things you just mentioned has to do with HFT?
Okay, all of those things were perpetrated by the same group of people who are running HFT systems.
And despite Tim's simplistic explanation, the algorithms used in HFT don't just perform time arbitrage. Time arbitrage is always brought up by supporters of HFT; they rarely bring up the fact that the algorithms aren't restricted to that and there is already evidence of the algorithms manipulating stock prices in ways totally unrelated to time arbitrage (beyond frontrunning).
To go back to Tim's gun analogy, would you give out guns to people who had used them to murder in the past?
> which is why, for the group of people in your example, we hold elections and throw out those we really can't stand.
Yes, but I think you missed the point, so I'll backtrack.
This article is about HFT. Steve Knox criticised HFT by bringing up a load of things none of which have anything whatsoever to do with HFT. When asked what they had in common, he said they came from the same group of people. By which he can only mean bankers in general, because it's not as if all the things he mentioned come from the same departments or trading markets or anything more specific like that. So his argument is: A is bad; the people who did A and the people who did B work for the same type of organisation: therefore B is bad.
My counterargument was to point out that exactly the same reasoning can be used to conclude that (for instance) the founding of the NHS and the privatisation of the Royal Mail are morally identical. Which, whatever you think of either act, is obvious bollocks.
> The founding of the NHS and the privatisation of the Royal Mail were perpetrated by the same group of people too: governments.
Ah yes, "governments", that self same group of people who both abolished slavery and sent Jews to death camps.
A similarly absurd comparison, of course, because those who founded the NHS were not the same people who privatised the Royal Mail. But those who wield HFT are the exact same people who wield all the other tools of stock market manipulation.
> Ah yes, "governments", that self same group of people who both abolished slavery and sent Jews to death camps.
Oo, thanks. Wish I'd thought of that example now.
> those who wield HFT are the exact same people who wield all the other tools of stock market manipulation.
No, they're really not.
The comparison of banks to governments is a fairly reasonable one, I think. Massive sprawling organisations, containing factions with a mind of their own. They have a handful of people at the top who try to control the whole thing but have only a limited effect. Certain things change beyond recognition with a change of leadership while other parts of the culture stay the same no matter how much the leadership try to change it. Various of the different parts of what is ostensibly the same organisation end up in effective competition with each other. You get the picture.
I have plenty of time for the idea that leadership comes with responsibiliy and so the CEO of the bank or the Prime Minister should take the fall when their underlings do something bad, even if they knew nothing about it or did know about it and had tried to stop it. Fine by me, and I think the salaries reflect that risk. But to argue that two things must be morally identical because they were perpetrated by people within the same organisation is nonsense.
If you don't like the example of two different governments, fine. Plenty of totally unrelated stuff comes from the same government. How about the Affordable Care Act and the Christmas tree tax? Or the invasion of Iraq and the creation of the Ministry of Justice? Or sending Jews to death camps and building a really effective network of motorways?
Permit me. I'm no economist but some things seem evidently crap. So...
It's about the *attitude*, which is that any tool (HFT is one) is to be exploited to the max and damn the consequences: 1) TBTF, let the peasants pick up the pieces 2) the mythical balance that the free market tends towards. I don't believe (2) any more, at least under the system we have now.
a) HFT gives advantages to the biggest guys. Most can't afford it but they can, so they profit at the expense of those who can't.
b) HFT may be associated with volatility; from <http://en.wikipedia.org/wiki/High-frequency_trading>
"HFT may cause new types of serious risks and dangers to the financial system.[14][1][15] Algorithmic and HFT were both found to have contributed to volatility in the May 6, 2010 Flash Crash, when high-frequency liquidity providers rapidly withdrew from the market.[1][15][16][17] Several European countries have proposed curtailing or banning HFT due to concerns about volatility.[18]"
c) Morality doesn't matter, as exemplified here. "and can be thought of as being a bit naughty.", "Certainly, if you get the information from your mate executing the large order and do this you're guilty of insider trading. ... Whether this is important is another matter"
'naughty'? whether illegal trading is 'important'?
d1) divorce from reality. This is what causes bubbles which inevitably explode. The more divorced, the bigger the bubble, the bigger the final bang. I've seen a bloomberg terminal and it feeds you apparently pure information from which to make decisions. Knowing a specialist corner, we checked it out and the info was markedly dodgy. If you don't realise that info is corrupt you make wrong decisions as a human, and far more so if you get a program to deal with it.
d2) divorce from reality redux. Manipulating the markets at a distance allows one not to see what it does the peasants[*] at the bottom of the heap working in virtual slavery in many places. Their lives can be unpleasant, sometimes short. Also they get pressured in other ways. I knew a thai woman, she said that the poor in her country used to get by because there were many small areas where food would grow wild or could be grown. These areas are now being snapped up, consolidated into bigger farms and the poor go hungry. These bigger farms grow stuff for export. I'm sure the corporations owning them show up on bloomberg terminals in nice colours.
e) They'll just use it to fix other stuff to their advantage. Just another tool to abuse.
In summary HFT is a tool but I don't trust the wielders. I also simply don't trust Tim Worstall to even try to present a balanced picture.
Just a thought from a non-economist, so, does that at least make some sense or am I missing something crucial, Victor?
[*] I'm sure he used that word deliberately to provoke.
> 'naughty'? whether illegal trading is 'important'?
Well, there are some completely sane arguments that insider trading should not be illegal because (a) no-one's yet been able to properly define it and (b) it actually does some good. For instance, when a big company is crashing secretly and its senior managers are shoring up its share price by lying through their teeth while they get their money the hell out, a bit of insider trading would tip off the market and therefore the public and allow ordinary people to lose less money. Yes, it would also allow people to profit in other situations. Maybe the pros outweight the cons and maybe not. My point is that "Whether this is important is another matter" is a perfectly reasonable thing to say about insider trading.
And here we see more rose tint in the Googleglass.
Where is the incentive for *ANYONE* to "alert the public" if they have money in the markets? Insider trading only works AT ALL when the information is kept close to the chests of a few "insiders". That's why it is called "insider" trading. You *don't* alert anyone in the case you cite because if you so much as sell to fast the HSTs and humans with better connections will stampede and you'll be broke in sparrow's fart time.
Quick analogy for you: do sellers on eBay benefit from the now-common practice of high-speed end-of-sale "sniping", or were they better off when people just bid throughout the sale?
Why is this an analogy? Because the stock in your pension fund is only worth what it will *sell* for. When you need the money, this sort of fuckwittery will ensure you don't have any.
> Where is the incentive for *ANYONE* to "alert the public" ... You *don't* alert anyone
When you trade based on information, you place the pricing elements of that information into the market, by definition. The market may not know the rest of the information, but then it doesn't need to.
Apart from that, I don't need to defend insider trading, as I didn't say I supported it. I was just pointing out that there's a reasonable debate about its legality and morality, and that therefore saying that it may or may not be important is hardly as rabid a thing to say as whoever-it-was-up-there screeched.
"...when a big company is crashing secretly and its senior managers are shoring up its share price by lying through their teeth while they get their money the hell out..."
is pretty much the definition of insider trading. The insiders have information unavailable to the general public (the company is in bad shape financially and is lying about it to the public) and they are financially benefiting from that knowledge.
Something that "...would tip off the market and therefore the public and allow ordinary people to lose less money..." would be whistleblowing on that insider trading.
> is pretty much the definition of insider trading. The insiders have information unavailable to the general public (the company is in bad shape financially and is lying about it to the public) and they are financially benefiting from that knowledge.
Agreed. However, interestingly, this is the legal type of insider trading, which is where the problem arises with defining it -- which is the other reason there's a reasonable debate about whether it should be illegal.
If you have insider information, it is illegal for you to make a trade based on that information. However, another way for you to use insider information is to not make a trade that you otherwise would have made, which is perfectly legal, because obviously it's impossible to criminalise a non-action. But both types of use of insider information can be equally profitable.
If you want to shore up a worthless company's share price, the last thing you want to do is to sell stock, as selling large amounts of it would signal to the market that it's worth less than believed. So, in such a situation, the legal non-active type of insider trading -- insider non-trading, if you like -- is the dishonest immoral thing, whilst the illegal type of insider trading is what would help thwart the immorality. That perverse incentive is why some quite serious experts want insider trading legalised.
"Oh, LOL, now explain what all of these things you just mentioned has to do with HFT?"
If you add HFT to some of the ingredients in that list, you get a nasty broth. Whoever knows the quirks, errors and biases of a given HFT algorithm - no matter whether said errors are unintentional or otherwise - has a powerful tool to perform price fixing and/or related malfeasances. Insider trading? Ditto. The ability to hack some news site so that for a few hours or even minutes it displays false data, coupled with HFT, can give the crooks the financial equivalent of a thermal lance against the fabled free markets.
"If you add HFT to some of the ingredients in that list, you get a nasty broth."
So you would if you add HFT to, say, an exchange system crash or a a major bankruptcy or nuclear war. That in itself does not make HFT any worse or more dangerous than any other routinely used systems - payments processing, comms, transport, power grids etc. If any of them breaks, it's usually unpleasant and disruptive and people want it fixed ASAP.
"Whoever knows the quirks, errors and biases of a given HFT algorithm - .... - has a powerful tool to perform price fixing and/or related malfeasances."
No, not really. If you know the deficiency of an algorithm you can theoretically exploit them against the company that uses it, yes. You will need to find a serious backer though. If you are a disgruntled programmer you won't have the capital needed to set up your own HFT trading outfit to play the algorithm. So, you will need to go to the competition, not that such cases are unheard off, but it's not easy and it will be detected unless your backer is very, very patient and careful - which they won't be or they wouldn't try it in the first place.
But as for rigging the markets with HFT? That just not how it works. You can move the markets unintentionally, sure, but there it's - you move them, you pay for it.
Rigging is done by humans through collusion, disinformation, fraud, social engineering, exploiting or cornering the OTC markets.
"So you would if you add HFT to, say, an exchange system crash or a a major bankruptcy or nuclear war. That in itself does not make HFT any worse or more dangerous than any other routinely used systems"
Yes, yes it does. You do not want lightning speed reaction during a crisis. You do want lightning speed decision making. But knowing how to manage when to act is the key. Act first think later can be a problem. Any algorithm is designed first, implemented after.
Put it simply, if your computer is going wrong, probably not best to type out "format c:" too quickly, as the PC will action it at "high-speed", before you realise you want to turn it off. It appears HFT is a similar problem (but I'm no expert or judge on the matter :P ).
(PS, mine is the one with the file recovery USB for quick formatted disks... pray you did not full format it)
"You do not want lightning speed reaction during a crisis. You do want lightning speed decision making. But knowing how to manage when to act is the key. Act first think later can be a problem."
Yes, you are quite right. That's why the exchanges use trading halts as a "circuit breaker" when panic starts. They have come up with that protection mechanism long before even manual electronic trading appeared, because with humans panic works just the same as with algos.
The difference is that for humans an exchange may halt trading for 5 minutes for "cooling off", while with algorithms, as was the case with the Flash Crash of 2010, the CME only needed to stop it for 5 seconds.
But as for rigging the markets with HFT? That just not how it works
One of the possibilities that has been amply discussed about HFT is that it could be used for simulating a 'landslide' in some stocks prices, and also be fooled to believe that one of these landslides is taking place.
A 'privileged party' with access to this technology and a lot of capital has a(nother) great tool for manipulating the markets.
Rigging is done by humans through collusion, disinformation, fraud, social engineering, exploiting or cornering the OTC markets.
Totally agreed, but allowing this technology to 'the usual suspects' -e.g. Big Money- is like allowing the neighbourhood junkies to own UZIS. The synergies between HFT and the other means available to the miscreants are too big to just ignore them.
"One of the possibilities that has been amply discussed about HFT is that it could be used for simulating a 'landslide' in some stocks prices, and also be fooled to believe that one of these landslides is taking place."
But you don't need an HFT system to start a selling-off panic. Much cheaper just to bribe an analyst to twat something on Twitter...
"A 'privileged party' with access to this technology and a lot of capital has a(nother) great tool for manipulating the markets."
The problem with this approach (exactly as with manual attempts to move markets) is that you start with a lot of capital and end up with much less, which is usually not what the manipulator wants to achieve. In addition, by doing this you are sticking out as sore thumb in the market and the regulators will have your hide in no time. Finally, you will be the laughing stock of the entire market when it's all finished.
The Hunt Brothers and the silver market being a clear case of that.
More interestingly, for all the bitching about them having privilege, everything they did was legal and everything was done at slow speed. Until the regulators decided to stick it to them and everything collapsed faster than it was put together.
"So HFT doesn't screw over investors, it's people who screw over investors?"
Perhaps I did not explain it clear. HFT (systems AND people who use them) and market manipulators (people and systems they use) use totally different properties of the markets, different methods, channels and opportunities.
The big danger is that the algorithms find themselves in a Feedback Loop.
This has already happened a few times over the years with computerized trading.
A Network of Computers playing their algorityms off against each other can and will blindly crash the markets in Milliseconds.
Add in the HFT corporations which are actually Paying the exchanges for Insider Information and you get some seriously ugly activity.
They get away with it because the laws against Insider Trading only apply to messages passed from Human to Human. If you pass it Computer to Computer, the laws don't cover it.
"A Network of Computers playing their algorityms off against each other can and will blindly crash the markets in Milliseconds."
Yes, so what? Do you think human-only market are immune from that? No indication though that any of the crashes where machines may have been involved has been any worse than any other crash where they haven't. Actually, markets seem to recover from these technical glitches much faster today and with fewer consequences than in the past.
"the HFT corporations which are actually Paying the exchanges for Insider Information"
You don't seem to understand what Insider Information means. Exchanges don't have insider information. The market data they have and sell (legally and openly) is not "insider information", it's available to anyone - you can buy it yourself if you want and have the cash.
The market is more than deeply dodgy, but can we park that for a moment and talk about HFT and the interesting issues that arise simply within this topic? I thought the article was a good analysis of the problem. I had peripheral involvement with some of these trading systems as they were coming online in the early 2000s, and remember much debate about the value of a nanosecond.
> but can we park that for a moment and talk about HFT and the interesting issues that arise simply within this topic?
First time I've ever disagreed with anything of yours, but no we cannot park it up to admire the paintwork. Things have consequences and however intriguing HFT may be as a tech and intellectual problem, it is potentially another sharp stick in the hands of idiots.
(edit: apologies, that came out a bit rough, but I've spent my entire working life considering the consequences of what I do and in some cases turning down jobs because of that)
What has algorithmic trading got to do with any of the listed scandals in your comment? IMHO, this is the general problem, anything wrong in banking/markets is naturally blamed on the least understood of all components.
If you read some of the details surrounding recent flash crashes (say 2010), you'll see that even there, the exchanges have found that it has little to do with HFT, and most likely the result of something done by a meatbag. Typically such an action would ripple across any algorithms (as it did in 2010), but you'll also find that the algorithms also help to stabilize the situation and provide the necessary liquidity.
OK: Libor fixing. Came in two flavours. One, traders would get their own blokes to skew the quotes a basis point or two in order to favour their own trading books. Of minor importance in the scheme of things as the various traders would be randomly trying to influence the market their way. So no great danger to the market or society in general. Also illegal and people will rightly be going down for this.
Second flavour: the banks themselves misreporting Libor in the depths of the crisis. Note that what Libor is is the rate at which the bank thinks it can borrow, in that currency and for that time, in size. Note also that at the depths of the crisis no bank could borrow on any terms. The overnight market (which is what the Libor rate measures) simply disappeared. Everyone borrowed from the Bank of England instead. So, in this case, all the big money centre banks tell the Libor committee, well, to be wholly honest, we can't borrow at all. Interest rates are effectively infinite. Libor thus soars to what, 100%? More?
Think that does us any good in the depths of the crisis? No one's actually going to come out and say it publicly (well, me, but I mean anyone important) but everyone's damn glad that the banks were lying through their teeth that couple of weeks.
FX I did hear something about fixing but don't know the details, sorry. And commodity price fixing, what story is this? Sure, there's always been people who try to corner the commodity markets but the usually go bust, like the Bunker Hunts and that Sumitomo trader. But what story are you interested in today?
The banking meltdown, you may have noticed that some people did forsee it. Paulson for example: and he and his bet were the subject of an earlier book by, umm, Michael Lewis.
Enron was criminality, pure and simple. I hope we're not about to start claiming that without financial markets there would be no tea leaves?
> Second flavour: the banks themselves misreporting Libor in the depths of the crisis. [...] No one's actually going to come out and say it publicly (well, me, but I mean anyone important) but everyone's damn glad that the banks were lying through their teeth that couple of weeks.
Right, so the banks didn't predict the collapse they in large part led us into so when it when it blew up in their faces they had to lie to avert a likely disaster?
Yes, they had to lie because they fucked up because those wankers couldn't see what was coming even though it was their fucking job?
And you're presenting their lying as a good thing while kind of not noticing why it was needed??? You are beyond incredible.
I suppose genocides in africa aren't all bad because, damn, gonna be a lot of jobs re-sharpening those machetes afterwards.
> Right, so the banks didn't predict the collapse they in large part led us into so when it when it blew up in their faces they had to lie to avert a likely disaster?
There are two problems with this argument. The first is that you seem to be suggesting that, if someone does something wrong, they may never ever be allowed any credit for trying to alleviate the problem. I'm a grumpy judgemental unforgiving curmudgeon myself, but I still don't treat other people quite that harshly.
The more serious problem, though, is your use of the phrase "the banks" to describe one entity with one set of opinions and actions. That is simply not the case. The crash was caused primarily by bad mortgages. The guys responsible for the Libor fixing had sod all to do with that. Most investment bank employees have been spending the time since the crash working their arses off trying to fix and improve the system. Should we give "the banks" credit for alleviating their mistakes? Arguably not; it's what we expect anyone to do. But should we give credit to sections within banks for trying to fix the mistakes other sections made? Well, why the hell not?
> The first is that you seem to be suggesting that, if someone does something wrong, they may never ever be allowed any credit for trying to alleviate the problem.
*They* should be given 'credit' for lying to cover up the continent sized turd *they* created?
And how badly does one have to fuck up before one is judged unfit for a post? (this is stuff that could trash a country's economy, just in case you hadn't noticed. Saying Oops and giggling over your little mistakes is less attractive in the banking sector than it is in children, I find).
> The crash was caused primarily by bad mortgages. The guys responsible for the Libor fixing had sod all to do with that.
I did not suggest that the libor guys necessarily had anything to do with the mortgage guys. However if you stand back and squint you might notice the former were dishonest and the latter were incompetend (and in some cases dishonest as well, packaging up known-crap mortgages as AAA and flogging them off, some US banks did that, recall?). Do you detect a pattern?
> Well, why the hell not?
Something seems systemically broken. We need to find out what it is and fix it, not make excuses.
> The first quote is you doing exactly what you claim in the second quote you're not doing.
First quote is *They* should be given 'credit' for lying to cover up the continent sized turd *they* created?.
That we me sounding incredulous that you could even propose as excusable their lying to cover up their mess.
second quote is I did not suggest that the libor guys necessarily had anything to do with the mortgage guys.
Which says I agree with your point that the two banking sectors were distinct and likely unrelated.
What's the link between them? Where's the contradiction?
And you've avoided my questions, to wit
> And how badly does one have to fuck up before one is judged unfit for a post?
-and-
> Do you detect a pattern? (viz. of large scale incompetence and/or deceit)
> First quote is *They* should be given 'credit' for lying to cover up the continent sized turd *they* created?.
Yes, and tracing back up the conversation for context, the first "They" refers to the guys who fixed Libor and the second "they" refers to the people who created the banking crash, which you acknowledge weren't the same people.
Have you never worked somewhere where some people fix or alleviate the errors of others? Quite a normal line of work, in my experience. Doesn't deserve a medal, but doesn't deserve demonisation either.
> And you've avoided my questions
No, I just saw that you don't even understand what you yourself are writing and decided that the chances of you understanding what anyone else is writing are even lower, so decided not to bother. But OK, then.
> how badly does one have to fuck up before one is judged unfit for a post?
Are you suggesting that no-one in banking lost their jobs over the '08 crash? Since I personally opposed the bail-outs and have said so many times, I simply have no case to defend here: had I had my way, far more bankers would have lost their jobs, being judged unfit for their posts by the market itself, as they should be. (My preference, if anyone cares, would have been to let failing banks fail but then, if necessary, to bail out the non-failing banks affected by the knock-on effects.) For the record, banks are still restructuring now as a result of the crash, which includes job reductions, while the economy as a whole is apparently now picking up and unemployment beginning to fall. This isn't a sob story, just a counterexample to your claim that no-one has been judged unfit: entire departments have been judged unfit for purpose and are being got rid of.
> Do you detect a pattern? (viz. of large scale incompetence and/or deceit)
No, I think there was some incompetence and some deceit, with large-scale effects. Large-scale deceit sounds nice to conspiracy theorists, but the truth is more mundane: banks are comprised of humans, with all the good and bad that entails. Which, really, was all I was saying, in response to your insistence that every single employee of every single bank is directly guilty of causing the crash.
Right, I see what you're saying. OK, my original use of 'they' was referring to banks as corporate entities in their entirety. The 2nd use was libor fixers as a few individuals. I was unclear. My mistake.
> Have you never worked somewhere where some people fix or alleviate the errors of others?
Let me try to be clear: I don't think banks (as collective entities) did an acceptable job. Libor fixing was insider by individuals, ok, fair enough, but insane lending practices were systemic to the banks' structure, not isolated pockets of people within. That's the problem.
> Are you suggesting that no-one in banking lost their jobs over the '08 crash?
Are you implying the people responsible were all held accountable? Perhaps any sent to prison? The people responsible for loosening banks' lending practices? What are you trying to defend?
Yes, the line between a banking corporation and the people that compose it is not being well represented here by me. I accept that.
> far more bankers would have lost their jobs, being judged unfit for their posts by the market itself, as they should be.
The idea of 'the market' ... I have no faith in it any more (as it stands currently).
> This isn't a sob story, just a counterexample to your claim that no-one has been judged unfit
Don't misrepresent me. I never said that.
> in response to your insistence that every single employee of every single bank is directly guilty of causing the crash.
Or that.
> No, I think there was some incompetence and some deceit, with large-scale effects.
SOME?? jesus, SOME??!?
> OK, my original use of 'they' was referring to banks as corporate entities in their entirety. The 2nd use was libor fixers as a few individuals. I was unclear. My mistake.
But you weren't unclear. You were in fact very clear: every time I or anyone else has suggested that "banks in their entirety" and "some people who work for certain parts of banks" be treated as not exactly the same, that's exactly when you've flown off the handle. What started this whole conversation was your fury with Tim for suggesting that it was a good thing that the Libor fixers did what they did, because, you said,
> Yes, they had to lie because they fucked up because those wankers couldn't see what was coming even though it was their fucking job?
If you now acknowledge that the "they" and "they" in the above refer to different theys, how does it even make any sense?
> Don't misrepresent me.
Yes, it does seem a bit pointless when you're doing such a great job of it yourself.
No, I was unclear. funny thing is, this bit
>> Yes, they had to lie because they fucked up because those wankers couldn't see what was coming even though it was their fucking job?
was clear. That it was about banks as entities, not libor fixers. is utterly clear. Here is that quote in context (from here):
"
>> Right, so the banks didn't predict the collapse they in large part led us into so when it when it blew up in their faces they had to lie to avert a likely disaster?
>> Yes, they had to lie because they fucked up because those wankers couldn't see what was coming even though it was their fucking job?
"
Banks + established policies, see, not libor fixers. Don't misrepresent me here like you tried to misrepresent me before (I did not say the two things you attributed to me in your previous post, here).
You're working hard to defend the banks & their greed, ineptitude and the danger that came from this. You're most insistent. Curious.
(by the way you've not said anything about my post here about whether the Community Reinvestment Act did nearly as much damage as you say it did. As I don't have the background to judge I'd be interested in your opinion.
I take it you're just providing links to look confident, hoping no-one will actually click on them. I have no idea why so many arguments about what people actually said end up happening on Web messageboards where everyone can actually read it so memory isn't an issue. Curious. And tedious. Anyway,
> Here is that quote in context
Well, not all its context: you appear to have missed out the quote you were replying to, in the same post, unequivocally:
> Second flavour: the banks themselves misreporting Libor in the depths of the crisis. [...] No one's actually going to come out and say it publicly (well, me, but I mean anyone important) but everyone's damn glad that the banks were lying through their teeth that couple of weeks.
Libor fixing. Hey, you chose to quote that bit of the article and then write stuff immediately after it. Don't blame me if people might have thought you were referring to it.
> You're working hard to defend the banks & their greed, ineptitude and the danger that came from this.
What, you mean like when I said that I was against the bail-outs and that I believe failing banks should be allowed to fail, which would cause more bankers to lose their jobs when they screw up? Yeah, they could probably do without defenders like me.
Like I said, Web arguments about "I really didn't say that thing that you can read if you scroll up!" are one of the most tedious things imaginable, so I'll stop now.
Bye.
Proximal, but not root, which is the biggest problem with trying to fix what caused the market crash. The root cause was that the politicians FORCED the banks to make bad mortgage loans and racism is still at the heart of the problem. Despite sound methodological studies which show banks do not redline based on race but only on actual loan risk the politicians continued to demagogue the issue and force banks to make loans to black people who shouldn't have gotten them. But if they left it to only black people who couldn't afford them they could be sued for reverse discrimination so they also got extended to other people who couldn't afford them. That left the banks holding loans they knew were no good which is a violation of their fiduciary responsibility to the stock holders of the bank. Again a suing offense. So they looked for a way to offload the bad loans and hit upon the MSB. Which would have worked if the MSBs had been priced appropriately and the risk assessed properly. But the risk wasn't assessed properly. It was assumed that because an MSB consisted of nothing but mortgages it was in the same risk class. And it was handled that way until some German company tried to collect on an MSB that didn't pay their note on time by foreclosing. At which point the property owner defended by saying "but you don't own the mortgage." Which the courts properly held they did not. So the MSB holder dumped their holdings to convert it to other reliable assets.
And THAT is when the bottom fell out. Because 20 years of making lots of bad mortgage loans had been spread all over the market in MSBs. And the payment came due all in one week.
We've played around the edges trying to shore up the banking system. But the fundamental problem still hasn't been repealed: The US Congress still requires banks to make loans to people who can't afford them or face being charged with racial discrimination.
> We've played around the edges trying to shore up the banking system. But the fundamental problem still hasn't been repealed: The US Congress still requires banks to make loans to people who can't afford them or face being charged with racial discrimination.
Well said, sir. You are going to get so many downvotes.
That aside, though the US was the source of the major part of the crash, I believe the British retail banks did a certain amount of bad lending too, for different reasons. The funny thing about all this is that the problems are rooted in what politicians and regulators made retail banks do, and as a result the public are demanding more legislation and regulation, and the politicians and media are calling for the "safe" retail banks to be separated from the investment banks which "caused" the crash. Funny old world.
Yes, this being El Reg I expect to rack a good few down votes.
And I do quite understand there was a fair bit of knock on afterward. With the slick players making money on the scam, everybody else joined in too.
It's been a while now, but I read an article once about a company that specialized in profitable NINJa loans before the bubble. There's a particular segment of the employment market where you have people with unpredictable yearly incomes and small base salaries. Think really high power commission salesmen. If the sale comes through they pocket a couple hundred thousand, otherwise bumpkiss. So they want to buy a house, but their official salary is only $50,000/year and you can't count the bonus because that's not recurring. So they came up with alternate criteria for analyzing these individuals and giving them loans. Most important was the meeting with bank officers in which they personally appraised your character. And because they were high risk, and good at their assessments, they made good money and never were in risk of bankruptcy. Everybody else saw what they were doing and jumped in for the profits without knowing the secret formula with predictable results. IIRC the NINJa specialists also weren't a commercial bank, just a private lender assuming all the risk.
> You are going to get so many downvotes
Reg commenters aren't perfect by any means but a valid point still counts. Let's actually count the downvotes when they happen, ok?
> The US Congress still requires banks to make loans to people who can't afford them or face being charged with racial discrimination.
This may or may not be valid. I can't judge but maybe you can <http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4136&TC=1> "Did the CRA cause the mortgage market meltdown? / / Two Federal Reserve economists examine whether available data support critics' claims that the Community Reinvestment Act spawned the subprime mortgage crisis."
Summary:
"Two basic points emerge from our analysis of the available data. First, only a small portion of subprime mortgage originations is related to the CRA. Second, CRA-related loans appear to perform comparably to other types of subprime loans. Taken together, the available evidence seems to run counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis."
Like I said, I can't judge the veracity of this.
> British retail banks did a certain amount of bad lending too
Yes, I know a couple that got into huge debt (like, huuuuge), and the deeper they went, they observed that the more the banks pushed loans at them (until it went titsup). The bank then reduced their repayments to sweet FA & evergreened the loans so they don't materialise on their books for as long as possible. They certainly weren't an isolated example.
No, the root cause was that the bad debt which was encouraged at many levels in the extremely multi-tiered system for buying a house in the USA was bundled into packages and these bundles became an investment end in and of themselves.
Here is some food for thought: In a system where mortgage brokers take a commission every time a mortgage is taken out, where does the incentive lie: in selling a house once in a given period of time, or in selling it many, many times in the same period?
Now consider the case of balloon payments. What factor do you think was foremost in said brokers' minds when pushing people to sign paper for which they couldn't possibly muster the dosh in the long term?
I'm rather closer to this nasty business than some here, and those pointing to group X (most popular are politicians, next the home buyers) are underestimating the incentivization issues that permeated and still permeates the home market.
The debt is the point these days, not the eventual settlement of it. That is why there is another crash waiting in the wings when holders of impossibly large student loans start defaulting. Their debt is also being bundled and traded around.
The situation with credit card debt (another bundled investment vehicle) got so bad that there was a popularization of the actual predatory nature of the business in the mid 90s and people, finally, got educated. Banks were told in no uncertain terms to stop sending pre-approved credit applications to debtors because they were not only making the problem worse by the hour, but were opening massive ID theft opportunities for the less lawful. After the crash they finally did stop, for a while, but I think it was because someone did a cost benefit analysis rather than an outbreak of sudden-onset ethics.
Faced with a record wave of personal bankruptcies brought on by impossible credit card debt, King George the Second reacted with firm and swift leadership and ... changed the law to make it much harder for a person to declare bankruptcy (but corporations were still able to avoid their liabilities with ease).
With leadership like this it is no wonder that the ship of state staggers from one iceberg to the next while everyone runs about asking what happened to all the lifeboats.
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> But that front running is something entirely different from the basic concept of HFT itself. Bit like a shotgun perhaps: which can be used to get yummy peasants* for tea or to take out the troublesome ex. One isn't a problem, the other is a crime – although both use the same tool.
Perhaps pheasants for peasants?
In effect TW is arguing that HFT clips smaller amounts off the coin than lower speed transactions. The 800lb gorilla in the room is that HFT limits trading to those who can afford the technology. Forget all the other arguments, which may be true; the markets are denied to the small players and so the big banks and hedge funds achieve a de facto monopoly on trading.
One risk of course is that a sub-economy is created - which already exists, e.g. peasants with gold in a sock in the mattress - and people start messing around with pseudo-currencies like bitcoin. This can itself be a de-stabilising influence. Another is that the "financial institutions" start dictating to governments. Because they can.
History shows that all financial innovations have downsides as well as upsides. The problem is, that whether it's margin trading or bundling mortgages and slipping the ratings agency a brown one to rate them AAA, the first warning that the downside has been discovered is a financial crisis.
> Forget all the other arguments, which may be true; the markets are denied to the small players and so the big banks and hedge funds achieve a de facto monopoly on trading.
I really don't see this. The only point of HFT is arbitrage. Arbitrage has always involved profits of tiny tiny subpercentages -- such that the only way to make real money out of it is to do it with staggering amounts of money. Arbitrage has never been any real use to anyone wanting to invest an amount as measly as, say, £100k. That was true in 1900 and it's true now.
Meanwhile, for more normal investments, the big banks all have customers. That's where they get their money from, in fact. They don't want to lock anyone out of the market; they want to use their size and power to make it easier for their customers to access the market. Which is hardly unique to banking: it's what wholesalers and retailers do as well.
"The 800lb gorilla in the room is that HFT limits trading to those who can afford the technology. Forget all the other arguments, which may be true; the markets are denied to the small players and so the big banks and hedge funds achieve a de facto monopoly on trading."
There is no evidence of that at all - go and trade something yourself, nobody stops you. If you don't like the volatility - you can use VWAP orders or something similar to average off the extremely short term fluctuations.
Before HFT, there were locals, who had similar advantages by virtue of being right there in the trading pit, watching and personally knowing the habits of other traders. The were providing the same function to the markets as the HFT does today (increasing liquidity, narrowing bid-offer spread etc), only more slowly.
In fact, it is the exchange locals who became displaced by the HFT, not other types of traders.
"In effect TW is arguing that HFT clips smaller amounts off the coin than lower speed transactions. The 800lb gorilla in the room is that HFT limits trading to those who can afford the technology."
No. HFT decreases the bid/ask spread that /everyone/ pays. This is explicitly explained in the article:
"More liquidity drops these spreads – so much so that we've had a two orders of magnitude drop in the spread over the last two decades as HFT has expanded. It has plunged from perhaps 0.2 per cent of the order amount in the early '90s to 0.002 per cent today. That saves money for everyone buying or selling anything: yes, including your pension plan even if you've no stock holdings directly."
No it doesn't.
HFT only affects HFT, except that it brings down the overhead cost to the buy and hold trader. Which is precisely the point Tim is trying to highlight. Because I only pay the .002 spread instead of the .200 spread when I buy stocks for my IRA, I gain .198 on each transaction. Over time those totals add up. Even if I was manually day trading, because my response time is much greater than the HFT, I'm outside their range of influence.
Where Tim is wrong is in his undying religious commitment to the socialist planning gods. People are more than materialistic consumers. The fundamental building block of socialism is that they are ONLY materialistic consumers. In fairness, this tends to be a problem with the "capitalism is always pure and good" acolytes as well. The truth of the market is that it is an amoral bastage who provides more of whatever you are buying. But because he provides more of what you are buying regardless of what it is is the reason that moral people CAN advance. Put anyone else in charge and you're stuck playing by somebody else's religious/philosophical view point.
I'm glad you put caveats in your statement, because I know quite a few people who make a good living out of the markets.
The trick is not to compete with the 800lb gorilla's.
The trick is to become an effective tracker, so you can see their footprints. This allows the small investor to predict (with around 50% accuracy) the movements of these gorilla's. Then you lay in wait for where the gorilla's live and pick up their scraps (they don't eat everything).
As long as you have a plan, can stick to it and can hit around 50% of your trades whilst maintaining a 3:1 reward ratio, you will make money.
Most people don't trade with a plan, and they are the ones that drive price into the gorilla's traps.
--> Paris, because one day I will be able to afford her. I wouldn't, but I could :)
But what's the point of it ?
It makes someone some money, sure. Presumably it costs someone else that money. There's no value added, is there ?
And ultimately that means the users (not the traders, the people who rely on the stock exchange for financing their businesses etc.) have to pay for those pointless communications systems and valueless traders. Just for passing-the-parcel with ownership of the shares.
"It makes someone some money, sure. Presumably it costs someone else that money. There's no value added, is there ?"
Since I wrote this, early this morning, I've seen an interesting piece of news.
So, who loses here? Well, the people who used to get those spreads of 0,.2% of the order size and now don't as the spread is down to 0.002%. Investors win as they pay a smaller spread, the HFT houses win as they make profits from HFT (which are smaller than the old market maker profits from the 0,.2% spread) so it must be those old fashioned market makers who lose. And on that subject, Goldnam Sachs is reported as selling a stock market making company for $30 million. A company in bought in 2000 for $6 billion. So, one of the people losing from HFT is Goldman Sachs.
Shame, eh?
@TW, ca 18:00(*)
So the commission the big boys pay is down to .002%. But if I buy £1000 of a unit trust the margin between bid and offer prices is still 5%. If I buy other products there is not the explicit bid/offer margin but there are other restrictions.
So all this "efficient market" guff is solely for the big boys, whether it is HFT or any other racket, er, market facility. Whether that is in the public interest is debatable.
(*)Dear Reg: I hate the relative time stamps on these comments. Please use absolute times.
@Tim, it is the multi exchange US problem whereby the trader sees 100,000 @ 26 for example but the 100,000 is split across a number of exchanges. What the trader would expect is that he can trade at this touch price. However, what the IEX guy demonstrated was that if he entered the trade in his system ready to execute he could count and whilst doing so the touch would still be there but as soon as he tried to execute it would disappear. They found that the order would hit BATS first before routing to the other exchanges to clear up the volumes being presented as touch. However, the HFT crowd would see the order on BATS and pull their quotes on the other exchanges before the trader's message arrived thus making the trade impossible. Ghost quotes I think was the phrase used.
In essence market makers (good HFT) are obliged to quote and to quote within certain offsets. The people supplying the ghost quotes were not market makers and thus under no obligations and can therefore get up to all sorts of shenanigans. There is information in this Zero Hedge article
http://www.zerohedge.com/news/2014-03-31/high-frequency-trading-why-now-and-what-happens-next
This one I believe is termed "Order Book Fade"
> And I have seen one proposal for doing away with that front running: let's have a financial transactions tax to make it unprofitable. Something which would, presumably, widen that spread back out to 0.2 per cent again, to the cost of everyone trading anything. What was that thing about babies and bathwater again?
This is an extremely unusual position for an HFT supporter to take. Normally they're going around saying things like: "I’ve been shouting about the iniquities of the proposed financial transactions tax for some years now: ever since it was first mooted in fact." (http://www.forbes.com/sites/timworstall/2013/05/08/the-financial-transactions-tax-will-just-kill-the-banking-economy/)
oh wait...same guy.
On re-reading it, I'll admit, he had me fooled. The fact that the thesis of the article was "Only some HFT traders are frontrunning" finishing with a paragraph that starts "And I have seen one proposal for doing away with that frontrunning" was just too much for my little hamster brain.
It seems to be that Katsuyama's new exchange has the flash boys terrified. From the 60 Minutes segment, I can see why. The main difference between BATS and IEX isn't the magic shoebox, it's that BATS would install one just to be able to sell the backdoor.
It's simple - to allow companies to raise the money to expand their business, for the benefit of all concerned, and for investors to invest their money in worthwhile businesses, to generate long-term returns. Anything else, such as the casino of HFT is generally against the principles of the stock market. Businesses should be able to have investors who want long term stable growth for the company, and who take an interest in the work of the company, not investors who know no more about the business than the stock exchange ticker name.
Two simple solutions, which wouldn't harm businesses and long-term investors, but would largely kill off the parasites:
1) The transaction tax - 0.5% should be invisible to a long-term investor
2) Returning to the use of papaer share certificates and share registers - no-one is the legal owner of stock until they hold the paper certificate and it is registered with the company; no-one can sell stock unless they are in physical possession of the certificates.
> 2) ...
Or maybe moving to a market where bids and offers are matched and transactions executed at the end of the day so that the highest bids get what is on offer at the mean price of each match. This would serve the long-term investor just fine while eliminating much of the volatility (and, incidently, HST ;).
"1) The transaction tax - 0.5% should be invisible to a long-term investor"
Well, yes, lovely. Except my one and only (as yet) peer reviewed paper is on exactly this. And the problem is that it isn't. Even the EU itself, when working through the implications of an FTT, said that it would raise the cost of capital to companies. And the IFS, when looking at the same thing, said that it would reduce pension returns.
The assertion just is not true....,.
The key word is 'long term' - if I or my pension fund is investing to give me a return of several percent p.a. for the next decade, then 0.5% at the beginning really should be pretty invisible (or 0.2% or whatever, just not 0.005%) - and if it's going to hurt 'the market' that much then allow investors to claim it against tax when they sell after 5 years
It wouldn't actually seriously raise the cost of investment to companies - it's the investor who is paying. And I would think many companies would welcome a bit of long term stability in their investor portfolio. Even if they do somehow end up picking up the tab, then if a 0.5% extra at the outset is all that stands between them and ruin then they're already a pretty bad bet for investment.
I like the way your response to a peer-reviewed paper and a thorough study by the EU (who, remember, are for the FTT, so hardly biased against it) is to say "really should be" and "I would think".
Incidentally, you've got the wrong answer to your original rhetorical question. "Why do we have stock markets?" is not the same question as "Why were stock markets originally invented?" It's like saying "Why do we have computers? To break Nazi codes. So all this silly word processing stuff can be stopped -- no-one needs it anyway."
"The key word is 'long term' "
Why is that the key word? Why should only long term investments be allowed? What are the reasons why you think it will be better for the economy?
Or is it just that you think - "oh, someone is making money in a way which I don't understand, I envy them, that's why they should be stopped"?
"if I or my pension fund is investing to give me a return of several percent p.a. for the next decade, then 0.5% at the beginning really should be pretty invisible (or 0.2% or whatever, just not 0.005%) - and if it's going to hurt 'the market' that much then allow investors to claim it against tax when they sell after 5 years"
Again, if you are ready to pay such costs upfront and intend to hold your investment for 'long term' regardless of what is happening with it in the meantime, why are you so bothered about the impact of HFT and extremely short-term volatility?
"Anything else, such as the casino of..."
I see you don't like speculation... which HFT isn't.
Speculation means taking a risk in the hope of eventual return. Which actually what any investment means, so (OMG!) any investment is speculative to one degree or another. But I'm sure you mean short term speculation, like day-trading... which HFT isn't either.
Actually, short-term speculation is absolutely necessary for healthy markets as long as there is not too much of it - it provides liquidity and a demand for risk, which other market participants want to off load (this is especially important in futures markets).
So you've never invested in stocks and are completely clueless about it then.
Your quoted rate is 2 to 5 times more than the current cost margin on my money market funds. Given I'm invested across about 7 funds each with hundreds of stocks in each fund, there's no way that is invisible to me as a long term investor.
"1) The transaction tax - 0.5% should be invisible to a long-term investor"
I would subject transactions to real sales taxes. Then it would be cheaper to invest in human beings.
2) Returning to the use of paper share certificates and share registers - no-one is the legal owner of stock until they hold the paper certificate and it is registered with the company; no-one can sell stock unless they are in physical possession of the certificates.
Exactly... you would buy in to a company for long term investment for expansion, which would lead to more hiring of human beings.
This is about converting priviledged access to profit, which is siphoned off from those without such access i.e. the market is rigged to the benefit those with such priviledged access. Attributing the spread getting smaller over time entirely to HST is sketchy at best, automating the trading in general and increased competition between exchanges is a more likely (and obvious) explanation. In fact, the front running at issue here would seem to have an opposite effect as the aforementioned profit doesn't flow from thin air, but comes from the regular buyers and sellers, who end up with paying slightly more (or getting slightly less).
I'm guessing I'm one of the few ex-Wall Street'rs who follow the forums and agree entirely with your sentiments. I worked in automated and proprietary trading for what was the biggest US bank prior to the crisis, and I can confirm everyone's worst fear:. the decadent elite don't 'see' the rest of us...
Film schools teach us there are no villains, not in the mindset of the bad guy. Instead a villain is just a guy trying to get through his day. Its the same with workers on Wall Street. They don't see harm in what they do or the knock-on effects. Its just about efficient markets man! Many are even revered by their families and friends for what they bring home. This is the how a system like the Street perpetuates itself
In actuality there are many disturbing mentalities on the street, one of which is trying to satisfy the wishes of those higher up. In WWII there were 'good' German doctors and nurses who killed their patients just to please the higher ups. This type of dogmatic obedience is not unlike how the street operates as it carries out 'God's work'.
On the retail end Wall Street is just a late night infomercial con job. But on the global markets side the Street can affect food and energy prices for vulnerable people in exposed countries. This street-slayer mindset is similar to the elitist thinking of global leaders, i.e. those who choose to wage wars. Why is that? Is it because both groups are so removed from it all? i.e. as long as the landslide isn't in my back yard, and my family and friends are safe, then its not really happening!
For me it all harps back to the murky roots of the Federal Reserve and how it serves the needs of global banks and their elite friends, whilst feeding off the rest of us. How else could financial crimes lead to paltry SEC fines and no admission of wrongdoing! My personal favourite is the Credit-Card-Monitoring fees that offer *you guessed it*…no actual Credit-Card-Monitoring! So how much longer will we all be enslaved by this system? I don't know.
While the article focussed on trading real world shares and commodities, it's apparent that the same systems have the potential for abusive naked shorting......
In what way especially given that one of the less well known aims of effective HFT is to hold nothing overnight add value ? The idea of the stock exchange markets was that risk was taken over an extended period of time to gain a return.
This is as abusive in it's way and as obvious in its motivation as abusing a game mechanic in a video game - to gain something by an unintended mechanism (latency). As such, and because of its nature as a market that only the big players can dabble in, and especially its potential for abuse and ability to bring down markets in milli-seconds, glib reassurance really doesn't cut it. These are potential tools of financial mass destruction regardless of whether through carelessness or malice.
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IEX has a "magic box" that has 50km of fiber in it. It introduces enough latency that the advantage is wiped out. No fuss, no muss.
The "problem" is that the HFT people want the LEAST amount of latency so they can get the quote and head off to the next exchange to do their deeds (trade before you). A delay of 50km (a fraction of a msec) is enough to really put a hiccup in their program. The exchanges just want "speed". No more, no less. The other functions don't matter.
As a 33 year old who's currently a student of the econometric arts, I got to write a wee paper on HFT. And explain it to 18 year olds, who often believe I'm pulling their leg when describing various financial instruments or mechanics. Some of the poor dears even look lost when we're just describing futures markets. The definition of a HFT order (a least in academia) varies, but generally that it is in existence for a very short period of time, usually microseconds. It's this rapid cancelling of orders (and high cancellation to fill ratio) and their affect upon prices that is missing from the article. When HFT is making all it's trades, all is well. When it pulls the plug, or only trades one way then bad things can happen.
A HFT trader gets to act like a market maker (like an exchange), by trading across the spread as explained in the article. This increase in competition has lead to a reduction in spreads (yippee!) without the requirement for the HFTs to trade in adverse conditions (boo!). The ability to withdraw liquidity from a market without any responsibility for being a market maker is not a good thing.
I presume the point about front running is that is hair close to insider trading (which is also hard to pin down exactly) which is A Crime. Stuffing order books, momentum ignition and stop hunting are unethical, but are impractical to stop with legislation, maybe with anti-dumping or anti-competition laws. But they do allow HFTs a great deal of not-outright-illegal ways to tamper with prices. Sometimes just the combination of speed, volume and lack of oversight means that laws are being broken, if only because those laws assumed a person at some point was involved. Events like the full flash crashes to the ongoing micro crashes (or deliberate dumps) show the issues, and each time things get a bit more fixed.
The suggestions I've seen for "fixing" it where: introduce high cancellation fees on orders or longer minimum offer times; requiring anyone with over a certain threshold of trading volume to have to act as a market maker (or a supplementary liquidity provider I believe it is termed); resolving transactions at regular intervals rather than in a continuous fashion (I've seen this suggested for values from 100ms to five minutes); and various forms of circuit breakers suspending trading if price moves too rapidly.
Of course, the idea that even if the various technical toys are taken away that the financial mafioso will suddenly not find more perfectly legal ways of fleecing all the other players is laughable. It isn't even a conspiracy (that would be hard to pull off) just a group of smart people who are given rules by a group of less smart people, and then seek to make the best individual profit within the rules given. HFT exists in part because of the legal requirements to give "the best" price (best value rather than fastest to close), which means getting some amount of the order book from each exchange, so everyone is all about getting the quotes around as fast as possible.
In the book a trader from Canada gets curious when he goes to make large trades and sees the prices disappear before he can make them. After a long investigation he finds that brokerage houses are selling the info on his trades to HFT's that co-locate and they buy the stock he wants at the price he wants before he can complete his trade. He then needs to buy the same stock from them at an inflated price.
Ironically when humans do this it is illegal. It is not fair or ethical. The author would know that if he read the book, instead now he looks like an idiot.
>instead now he looks like an idiot
Well, to be fair, he always looks like an idiot. And he's used this as an excuse to drag in his favorite 'black beast' again: "a financial transactions tax to make it unprofitable".
Tim: Spread is not inherently bad, it is bad because it is an indication of some second-order badness. When the second-order effects are good, spread is an indication of goodness.
Valuable economic activity takes place on slow timescales; days to build a car, months to grow a crop, decades to grow a tree. The stock markets fluctuate according to what people think other people will do, or, for HFT, what algorithms think other algorithms will do.
Take a high-quality audio system and stick a UHF amplifier into it. Turn the gain up. Does the music quality improve?
> Valuable economic activity takes place on slow timescales; days to build a car, months to grow a crop, decades to grow a tree.
Seriously? You're claiming that Henry Ford made building a car less economically valuable because he sped the process up? That agricultural techniques that enable us to grow crops faster decrease the economic value of growing those crops?
I think what he meant was that valuable economic activity takes place outwith the realm of milliseconds, not that slowness is inherently good.
Although I think you could make the argument that Ford speeding up the car process could have made it less good for the economy in terms of lowering the flow of money from wealthy industrialists to factory workers & taking jobs out of the economy. Not that I'm making that argument as I don't have the facts, I just think it could be debated.
> I think what he meant was that valuable economic activity takes place outwith the realm of milliseconds, not that slowness is inherently good.
OK, so we have an interesting academic point for Allan George Dyer to answer here. If doing the same thing faster than it used to be done makes it more economically valuable but doing things in milliseconds is inherently economically unvaluable, there must be some cut-off time under which economic activity ceases. What is that time, please?
This being an IT site, I shoud also ask about microchippery. The entire IT revolution is built on being able to do in tiny fractions of a second things that used to take at least seconds, mostly minutes, sometimes hours. Do computers decrease the value of economic activity because their speeds fall under the cut-off time (whatever it be)?
The economy is global, with 100s of millions of active participants at any given moment. That to me practically guarantees that economically significant events must be constantly happening down to millisecond scale. I may be wrong but it sounds logical to me.
If you look at, say, unfiltered Bloomberg news feed - new headlines there appear so fast, the old ones are scrolled off the screen before they can all possible be read...
OK, Squander Two, you're getting closer to my point, but I'm not saying that doing anything in milliseconds is inherently economically unvaluable, just that an ultra-fast stock market does not benefit the wider society. A good stock market directs investments into activities the society finds most useful, but HFT happens so fast it is all about what my algorithm thinks your algorithm is about to do, not the economic data that changes on much slower timescales. The value of, say, a company that manufactures high-speed switches to society does not change in milliseconds. The HF Traders trying to grab the money as it goes past faster than anybody else, but, as a result, they are making the system more unstable. An audio system designer will build in high frequency cutoff, not stick in a UHF amplifier, however useful a UHF amplifier is in another circumstance.
HFT trading was already known by the very capitalist and free-market economist James Tobin, and he said that HFT trading actually screws real investors, by making profits on tiny margins in the noise of all the transactions. That's why he propose his famous Tobin Tax on all financial transactions, so only real investors make money and not the parasites doing HFT.
As for, technically, how HFT is bad: very simple ! Who can actually DO trading at the highest speed ? Those with direct access to the market's computers, in other words the financial intermediaries ... but if those intermediaries do also trading in their own name, they have an insider advantage by knowing in advance what their clients are trading and can front-run them by making decisions based on information they have only because they are the intermediaries.
in other words:
- can I, from at home, trade on the markets ? yes, but I need a financial intermediary who will execute my orders.
- can the intermediary trade on the markets ? yes, directly, at any speed, in my name or for his own profit.
- can I, from at home, do HFT ? no. because the delay between the time I place an order and said order is executed is several seconds/minutes. And during this time the intermediary knows what I'm going to sell/buy, and he can contra-buy/sell to outmanoeuvre me. If I make a smart move, he even can do it before me, even if I thought about it first.
Tobin proposed his tax thinking that it may reduce volatility in forex markets, making government's job of managing their currency's interest rates easier. His proposal had nothing to do with trying to placate some traders who have a grudge against others, having a better access to the market place...
However, there is no consensus that such tax will in fact reduce the volatility and, in general, higher transaction costs are known to increase volatility (and bid-offer spread) and reduce liquidity.
"There are still a couple of centuries of Moore's Law necessary before we can actually do it in full".
Have you actually thought through the implications for the amount of *energy* that would also be needed? It won't do us much good to be able to predict everything anyone ever does before they do it, if we are N billion hunks of well-done steak, quietly smoking in the hellish hyperbaric acid atmosphere.
Although I agree the Tobin tax is a very, very good idea.
First, you haven't touched on one of the main issues described in ther NYT article which is the banks opaquely trading in their own "dark pool" before releasing the order to open market, something which wouldn't be possible without HFT. This strikes me as pretty important.
Secondly, the front running issue isn't a "bit naughty", it completely undermines your second argument which is that the reduction in spread resulting from HFT is good for the market - perfect information, flat market, good for everyone. Frontrunning doesn't flatten the market, it distorts it, and like naked shorting should be illegal IMHO.
Any finally, your HFT providing the flat market is an economist utopian ideal which doesn't exist. In the real world the banks making the market are also playing the market - the game is rigged, and tools like HFT, insider trading (did someone earlier really suggest this should be legalized? really?) and the "POS" attitude by the banks mean that this perfect information is not available to the market. It's available only to the banks, who profit, at the expense of their customers, who lose.
All of this comes down to your idea that an unfettered market is a good thing, which I flat out disagree with and cite... well, large chunks of the last 100 years as evidence.
"All of this comes down to your idea that an unfettered market is a good thing, which I flat out disagree with and cite... well, large chunks of the last 100 years as evidence."
I see your 100 years and raise you 6000.
The free market divides people into two teams and then incentivises both teams to find ways to break the market.
We should build a complex machine to run the market and our economy. Nobody really understands how it works, the algos interact with each other at an incredible speed. The life expectancy of these algos is a couple of weeks, so no time for any real testing.
And this is a great idea because HFT will reduce the cost of trading making it 99% more efficient, from 0.2% - 0.002%.
Not really. If a transaction of 100 is made, there was a cost of 0.2% or 99.8 efficiency. Now we have a cost of 0.002% or 99.998 efficiency. That's not a 100% increase in efficiency, it's a 0.1984% increase in efficiency.
Any other bright ideas Tim?
You fail your maths.
Assume I start with $100 (or pounds if you prefer) and I make a 7% profit when I sell. If I perform 1 mere 100 transactions on the last transaction you have cost me $14,024.89. Over all of the transactions you've cost me over $186,000. That close to 3 years of my current salary! I used 7% as a below long term market average for the return. I picked 100 out of my ass, but given how many stocks my mutual funds invest in, that is a low number. ALL of that cost must be passed to me, probably with a 10-30% markup for the people managing the fund for me.
"We should build a complex machine to run the market and our economy."
Don't you mean "a gigantic bank of computerzzz"? ala Doctor Strangelove? Then, use abandoned mine shafts for the remainder of humanity to dwell in, once the surface of the planet is reduced to rubble from the riots, looting and burning?
Rather than gritching about how high powered traders pull this kind of thing off, retail traders should be gritching about the fiat currencies that are driving them into the equities market in the first place. If they had a place where they could park their money and have it earn a fair return without any risk, they would be doing it. Unfortunately, every currency in the world steadily inflates, so it is not possible to simply leave one's money be and have it earn a satisfactory return. It is necessary to gamble with it in the equities market to realize enough gain to offset the ongoing inflation. There simply is no way to make a fiat currency such as the ones we are now using work. They will all turn into bog paper.
I really hope the poster above (@MonkeyCee) was being humorous describing the "econometric arts".
The first time I heard of the HFT dependence on time, I knew it was a scam.
However, mathematics would suggest a fair system could be constructed using timestamps, and the creation of a discrete event simulation. The resolution of the timestamp, would describe the accuracy of the transaction. The exchange would simply(!) process all timestamp increments at the same time. Conflicts could be resolved statistically or there could even be rules how to resolve them.
Since the physics prevent information propagating at faster than c, it should be relatively straightforward to calibrate the system and have the "timestamp" boxes become the gatekeeper for a given geographical location. I would expect the day trading networks would buy one for themselves...
It maybe fair that the exchanges (who are corporations , not government bodies) charge something for each transaction, but if HFT became HFDT (the D is discrete), there would be a rational basis that could be limited.
Perhaps I am biased, but as a scientist with an engineering background, it makes me nervous when complex systems are not designed with some rigorous maths...
Thoughts?
P.
"So explain to me the difference between "front running" - which is apparently only "a bit naughty" - and Insider Trading - which people go to jail for".
This isn't a technical question, but a political one. Insider trading, as you could tell from the fact that people go to jail for it, is something done by outsiders - little people - the kind of people who DO go to jail. The kind of inside knowledge that finance professionals and rich people's advisers use every day to make lots of money is obviously not criminal, otherwise important influential people would have to go to jail. And that can't happen.
You start off with high-speed trading (well, just arbitrage, as you said), then talk about how price of one commodity affects particular stock values. Then you say "Being able to cross-calculate these price changes also takes us a little closer to being able to plan the economy". But which price changes? The differences in prices that arbitrage exploits, or the correlations between fluctuations in one commodity and some other figures? It should be clear that the first kind of fluctuation essentially holds no information: I'd liken it to quantum fluctuations in a vacuum---it's meaningless, random, with any apparent information content just being an artefact of quantisation effects (in fact you can use the same language and say that arbitrage works because it exploits quantisation artefacts in different stock markets).
Lots of people, myself included, would argue that arbitrage doesn't really add value to an economy. You can argue for the "invisible hand", and that it's bringing the market in line with the ideal of perfect information flow but it's obviously not perfect or (a) people wouldn't be making money on arbitrage (how can it be perfect information flow if only some people are able to exploit stock/commodity data?), and (b) you've already mentioned that all this HFT can have bad effects as feedback loops (or "flocking"*) behaviour causes markets to go completely out of whack from time to time.
If, instead, you're talking about the web of connections and correlations between various stock and commodity prices, then you haven't established the connection between arbitrage or HFT algorithms and the ability to plan the economy. Quite frankly, that's a ludicrous postulation. Yes, I understand that you try to make the link by mentioning how algorithms are evolved, but consider:
* these algorithms aren't designed to build up an understanding of the economic system as a whole, but to exploit short-term fluctuations (including impulses deliberately injected into the system by buying and selling with a view to sending various stock prices in one direction or another). You literally can't see the wood for the trees.
* experiments with new models or new impulse triggers cost money--real money. You might argue that we can "evolve" better models this way, but in reality it's no different from a gambling addict pouring money into ever more complex (and fraught) betting systems. The only difference is that high-frequency traders generally aren't using their own money to fund these experiments.
* you can't account for (or predict) delays between an impulse and an observed effect. Eddie Murphy might have been right in his reasoning for when to buy/sell concentrated frozen orange juice in Trading Places, but he could just as easily have been wrong (it was just a film, after all). There's too much elasticity in time and in perceived value.
* there are too many hidden variables. If you can't even count the number of hidden variables, then how can you build a statistical model?
* all these mechanical traders are working in secrecy, so how are we to trust this as a means of economic planning (the "invisible hand" becomes a "shadowy hand").
* all these mechanical traders are also competing against each other, and they have no way of knowing (short of widespread industrial espionage) whether the observed changes are a result of "the market" responding, or simply a knee-jerk reaction by other trading bots. Again, hardly a sound basis for economic planning
Taking all this into account, your whole argument just falls apart. There definitely is something to be said for economic modelling that takes into account the whole web of ownership, profit and loss statements, bills of material, futures markets, taxation systems, shipping costs and so on. But to try to link this to arbitrage and HFT is a pure nonsense.
Then again, this sort of speculative (and flawed) thinking is just what economists do, right?
*re flocking: looks more like murmuration, but that's almost beside the point. I say "almost" because while you may be able to predict flocking behaviour pretty well, you've got practically zero chance of predicting behaviour in a murmuration. As with markets, there are too many free variables.
(apart from not having time to read more than the first page of comments)
The Masters of the Universe, with their HFT and smug belief that they know best, have eliminated any chance that the individual, small trader can succeed (except by luck and chance). The Masters, at the very least, have added to their costs. The economy now belongs to the few. (There are many further unrelated examples of this, but the net result is that equality, democracy and fairness have been defenestrated, despite our fervent desire to believe otherwise.)
Please note that Joseph Stiglitz won the Nobel prize in Economics for showing that the 'perfect exchange of information' on which the markets are supposed to operate is a crock of dung (otherwise known as information asymmetry, if you prefer) — but you all knew that, didn't you...
The only people who can't succeed are those who are too stupid to try in the first place.
My investments are up around $15,000 over the last year on a relatively small investment (making between 10 and 15% over the last few years) that has been consistently added over time. I project that by the time I actually do retire, I should be able to do so on my investments.
Well, technically one account. I've got a couple of others I didn't check on. One consistently returns 6-8%, the other should be in the same range as the one I checked. I've forgotten how much is invested in the second account so I can't estimate the raw return. It's the one my current employer is handling while the one I checked is my own IRA.
Interesting. I analyzed my investments for the duration of the Bush Years (all of them) and came to the conclusion that the money I had invested would have been safer had I put it in a shoebox under my bed and then set fire to my house. During Bush One I went to see a banker and used the phrase "hemorrhaging money", and he winced and said that he was hearing that phrase with every phone call and consultation he took.
Thank God for Clinton. A complete sleaze and part of the problems we have under the microscope today but his attitude on the intarwebs spurred so much quick cash generation I was able to absorb most of the damage to come with Bush 2.1 and Bush 2.2. Without it I'd be wearing cardboard and holding a soup can out to passers-by.
Most of these "traders" are, in fact, gamblers in a manipulated market that costs each and every one of us and society as a whole an awful lot.
These traders found it hard to understand and manage the pre-HFT systems, with examples going back centuries showing this. With computerised systems, restricting the advantages to a few, very well monied firms, it is clear that the users, the traders, are completely out of their depths, as are the most senior financial "experts", the sheer speed of the systems being unmanageable in terms of human monitoring. Additionally, how good and honest are the algorithms implementing the process? What are the specifications, implementations and tests?
Our clever politicos, such as Cameron, believe these people must continue to get extraordinary salaries and even more extraordinary bonuses so that we get the best people. The success of this strategy is shown, clearly, by the complete absence of any financial problems or misbehaviour in recent years, this probity being rewarded by those responsible still being in place.
The article's author needs to think rather more widely and dig a little deeper before playing Devil's Advocate, or perhaps he is just trying to provoke, naughty boy. Actually, perhaps he needs some real experience, at the sharp end, of supporting software, complete with night duty so he can savour the pleasures of being woken at 4 in the morning because the wonderful application has found yet another bug or the system configuration has failed to meet requirements yet again.
america is a corrupt cesspit, full stop.
wall street is a 'den of thieves' (as general jackson rightly called the central bankers).
an honest market place is just another option. if there's nothing wrong with the existing exchanges, let's see investors ignore the new one. if they don't and people flock to it, i guess there's a space in the market place for this exchange. i guess that will mean people don't trust wall street and let's face it, it's been a 'den of thieves' long before the federal reserve scam was set up!
THEY ARE CROOKS.
The original idea was to connect people who had an idea to create wealth with people who had spare money. Wealth creation takes time, generally years. So sound investors dont buy and sell at the speed of light. Warren Buffet, who does quite well at this kind of thing, likes to be in for the long term. So what's the point of all the super-rapid turn-over? Well it allows those who do it fastest to skim a profit. The alleged benefits being lower spreads, arbitrage and liquidity. But if you look at the high percentage of profit the skimmers make you should be able to work out the price real investors and real wealth creators are paying for this "market efficiency". If it's too high, what can be done? Maybe remove that nice little tax break skimmers enjoy: they can offset losses against gains. And then tune the fiscal system to favour wealth creation rather than the casino. A lot of people have an interest in endlesly increasing the volume of trades, but it doesn't create any wealth, just consumes it.
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