High-Speed Trading

L

Lake_Travis_Horn

500+ Posts
Just saw a bit on 60 Minutes about high-speed stock traders who use computers to trade based on very short-lived anomalies in the market. I am a conservative with significant libertarian leanings, but I find this troubling. These are people who are adding no value; rather, they are "gaming" the system and sucking value out and thereby denying that value to those people who are actually creating it. I think the rules of trading need to be adjusted to prevent such leaching.

Curious what others think, particularly those that might support this practice.
 
The only people who support this- are the hedge funds themselves, and their business partners- who happen to be the NYSE, NASDAQ etc. The most difficult part of this is telling the SEC to tell exchanges to restrict something that makes the exchanges money.
(Exchanges and associated parties earn fees for trades.)

As an individual with a Schwab or TD Ameritrade account- if you buy GE or Cisco stock for example, and have long term views and long term trade characteristics, at worst we are talking pennies off of your account because of this behavior.

But no doubt- what they do, adds zero value to anything, merely pushes paper around for an artificial profit, and yes that profit comes from people like us. It is analogous to the scheme used in the movie Office Space- which we should all know very well.
 
Wall Street firms have been doing various forms of arbitrage for decades. If shares of a Japanese company trade lower in Tokyo tomorrow, but the price of the ADRs in the U.S. market trade higher (allowing for dollar-yen exchange rate fluctuations), then any firm that can make a few bucks buying in Tokyo and selling in New York (as one arbitrary example) should be able to do so.

The real problem, is where high frequency trading programs are allowed to "front run" regular buy and sell orders by getting access to the order information a few microseconds ahead of everybody else. These programs then use this to place their own buy and sell orders ahead of others, picking up a few (free) fractions of a penny on trade after trade after trade.

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If information is made available simultaneously to all, then there should be no problem with anyone who can arbritrage away the difference(s). But when someone uses advance knowledge (that not everyone else has) to turn a buck, then that crosses the line (between fair and unfair) IMO.
 
I support it and anyone with "libertarian leanings" ought to as well. Programs are proprietarily created to give traders an advantage. To make money, you want to have every advantage at your disposal. There is nothing wrong, illegal or unethical about this. If the average investor wants to do something similar he/she can. What you really are bitching about here is that there are people out there that are smarter than the average investor.

And these programs absolutely do add value. They create value for their owners. What about jobs? Specifically career paths for MIT mathematicians? What about software suppliers? What about the trickle down effect from wealth building? What about liquidity creation for the market?

These criticisms are old and lazy.
 
People found a way to trick the housing market system through collateralized debt obligations. That worked out well I guess. What's the problem with a little creative accounting?
 
It may require more capital and brains, but any investor can do it.

lol.

In other words, no, not every ordinary Joe investor can do it.
 
From a macro level- one thing that is really sad is how many of our most gifted Americans, in math, science and business- are paid well to devote their careers to this crap. It creates zero value, lessens wealth from other Americans for no reason, and their talents are sorely needed in other areas like product development, technology etc.
 
Location Location Location. Electron propagation is about half the speed of light if I remember correctly (lightweight little buggers). Your program wants to be right a cross the street from wherever market computations take place.

It simply will not do to try this strategy from California if your market is in New York or China.
 
One thing that should not be overlooked is liquidity. Like high-speed trading or not, it has created liquidity and has lowered the spread on securities. For example, the current spread on IBM is now pennies. It used to be dollars. Everyone benifits from that.
 
Rex - what about the practice of flashing fake orders in order to sniff out market movements? that seems somewhat unsavory.

I don't buy the argument that it creates value because it makes people money. That may be a technical definition of the word, but it's not how most people talk about "creating value" when it comes to business activities.

I think we're pissing into the ocean if we try to ban high-freq trading though. It's technology, it's here to stay. However, rules and regulations should change as technology does and we are likely lagging behind the curve in that regard.
 
JM, we are talking about 2 different things. I am only defending high frequency trading. It is not unsavory. It absolutely does create value that is so obvious, I'm not going to repeat myself to combat mcbrett and the OP.
 
Well I'm sorry the folks at Instinet were not able to develop some sort of program that's commonplace and has been for about 30 years (the technology of which has evolved greatly) despite its outlay of "hundreds of millions."

Regarding the more capital comment, are you suggesting we outlaw practices that give investors with more means and brains an advantage? Are you serious? Think about that for a second, because that flies in the face of capitalism and will stunt creativity and growth.

This is not "gaming the system.". This is using tools at your disposal to create wealth. Does it suck that average investors might never employ such tools? I guess; it sucks that I was a 6'4" post player without a perimeter game while my buddy in high school was drafted into the NBA. It sucks I am not Warren Buffett's son. Life's not fair.

As far as why I don't employ such a strategy - it's not my business.
 
You just didn't understand the point- nor, do I think you are able to explain how dozens of hedge funds making money from high speed trading creates value. By value, its not a utopian phrase, its an economic term usually describing a good or service. This is neither- it is a tax on capital meant for public companies.
 
The SEC report on HFT said that there were 27,000 flash orders that resulted in only 200 net contracts.

That is market manipulation and per se illegal IMO.

And yes, this does provide liquidity, right up until it doesnt. See the May Flash Crash of last year. The markets shut down.

As for trading generally, its a zero sum game over the short run. The Wall Street trading firms are going entire quarters without one down day. This is statistically improbable to impossible absent market manipulation of some sort.

HFT is probably here to stay and isnt an absolute evil, but some reasonable controls are going to be necessary.
 
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