5 ms·

Insider trading is a term with a specific meaning, and that is not it.

sheepleherd 10y ago
Insider trading is a term with a specific meaning, and that is not it; true, but nor is the specific meaning of insider trading what most people think it is. "Trading on inside information" is a term for what many people attempt to do that is illegal. "Insider trading", on the other hand, is when insiders trade, which is totally legal, it's just regulated in certain circumstances when the size of the the trade is large or the person's role is at the executive level, an upcoming trade needs to be announced (made public) in advance as if itself it is information.
jandrese 10y ago
This argument always feels like "It's not a Pyramid Scheme! It's a Triangle Opportunity!" People use the term not because it is an exact fit, but because it is the closest match we have and the intention is largely the same. HFT being a lot about using computers to gain tiny information advantages (racing the speed of light between exchanges for example) to make perfectly safe arbitrages millions of times a day and effectively skim off of the top of the market.
- nickpsecurity 10y ago
  Exactly my intent. Well-worded. I'm not sure quite how to describe it how average person would understand. So, insider trading is one option to approximate it. Pyramid Scheme seems like another one in the rip-off aspect but doesn't fix the specifics as well. The traits to categorize are it's rigged, parasitic on others, requires enormous investment, and requires physical proximity that's fairly exclusive.
  - kbenson 10y ago
    > he traits to categorize are it's rigged, parasitic on others I'm not sure that's a good way to frame them. If you frame them as parasitic, then the argument shifts towards how we can stop them, as they don't provide any value. HFT firms do provide value in liquidity and more accurate market prices. Whether the cost them impose for these is worthwhile is an open question, but then the argument is about how to tweak incentives and rewards to best utilize this resource, not how to prevent it from working at all. The framing matters.
  - gnaritas 10y ago
    And all of those descriptions are wrong. They are not trading on inside information, it is not in any way a pyramid scheme or a rip-off, nor is it rigged or parasitic. If you think HFT is bad, you don't understand what it is. HFT improves market prices providing buyers and sellers with better prices than they had before HFT by narrowing the spread you have to pay to find liquidity. HFT is good and benefits retail traders.
- kbenson 10y ago
  > effectively skim off of the top of the market The problem with this point of view is that it implies they are just taking, and not providing. HFT provides a more accurate market price by providing liquidity at small price differences. Whether what they provide justifies their cost is another question though.
  - nickpsecurity 10y ago
    It's algorithms guessing about something in nanoseconds with little context. Feels like that would reduce accurate pricing. Not a finance guy, though, so my intuition could be wrong.
    - kbenson 10y ago
      To make money, they have to be accurately pricing. If the spread on something was $0.50, meaning that there are people on record as willing to buy at $0.50 lower than others are on record as willing to sell, the real price is somewhere within that range. Presumably, the real value of the stock is somewhere in the middle, but we don't know, because there's not any transactions happening right now, and the real value of something is the value at which people are willing to exchange it. HFT firms provide liquidity, in a lot more transactions, and at smaller spreads than regular people are willing to do (because HFT firms can automate away much of the work). This results in a more accurate price (smaller spread), and you being more likely to sell at that price (even if it's to a HFT). At least, that's the theory. I'm not a finance guy, but I've followed it here for quite a while, and this is my general impression of it. I used to be fairly anti-HFT until I learned more about it. Now I'm somewhat ambivalent, except for the topic of rogue trading algorithms, which seem fairly dangerous, but the genie's out of the bottle.
      - Retric 10y ago
        One of the most useful HFT tools is to reduce liquidity. Doing this over an hour would cost ridiculous amounts of money, but cornering a specific exchange over 0.01 seconds is cheap and potentially profitable. Remember, if a HFT extracts money that means the actual seller and actual buyer's price never meets which means the market is not doing accurate price discovery instead providing two prices separated by fractions of a second.
- gnaritas 10y ago
  > HFT being a lot about using computers to gain tiny information advantages (racing the speed of light between exchanges for example) to make perfectly safe arbitrages millions of times a day and effectively skim off of the top of the market. That's entirely wrong. There's nothing safe about it, and they aren't skimming, they're trading exactly like every other trader is, making a guess and risking cash to see if they're right.
sklogic 10y ago
Getting an information ahead of the rest of the crowd sort of fits under this specific meaning.
- cubano 10y ago
  Arbitrage has been around since the very beginnings of modern banking and provides a very important function to allow markets to accurately adjust to proper price signals.
- gnaritas 10y ago
  No it doesn't, insider trading means using non public information; not getting information faster which is and has always been a thing long before HFT ever existed. Information takes time to impact the market and always has and there's always been and always will be traders fighting traders to know that information first.

Insider trading is a term with a specific meaning, and that is not it; true, but nor is the specific meaning of insider trading what most people think it is. "Trading on inside information" is a term for what many people attempt to do that is illegal. "Insider trading", on the other hand, is when insiders trade, which is totally legal, it's just regulated in certain circumstances when the size of the the trade is large or the person's role is at the executive level, an upcoming trade needs to be announced (made public) in advance as if itself it is information.

jandrese 10y ago

This argument always feels like "It's not a Pyramid Scheme! It's a Triangle Opportunity!" People use the term not because it is an exact fit, but because it is the closest match we have and the intention is largely the same. HFT being a lot about using computers to gain tiny information advantages (racing the speed of light between exchanges for example) to make perfectly safe arbitrages millions of times a day and effectively skim off of the top of the market.

nickpsecurity 10y ago
Exactly my intent. Well-worded. I'm not sure quite how to describe it how average person would understand. So, insider trading is one option to approximate it. Pyramid Scheme seems like another one in the rip-off aspect but doesn't fix the specifics as well. The traits to categorize are it's rigged, parasitic on others, requires enormous investment, and requires physical proximity that's fairly exclusive.
- kbenson 10y ago
  > he traits to categorize are it's rigged, parasitic on others I'm not sure that's a good way to frame them. If you frame them as parasitic, then the argument shifts towards how we can stop them, as they don't provide any value. HFT firms do provide value in liquidity and more accurate market prices. Whether the cost them impose for these is worthwhile is an open question, but then the argument is about how to tweak incentives and rewards to best utilize this resource, not how to prevent it from working at all. The framing matters.
- gnaritas 10y ago
  And all of those descriptions are wrong. They are not trading on inside information, it is not in any way a pyramid scheme or a rip-off, nor is it rigged or parasitic. If you think HFT is bad, you don't understand what it is. HFT improves market prices providing buyers and sellers with better prices than they had before HFT by narrowing the spread you have to pay to find liquidity. HFT is good and benefits retail traders.
kbenson 10y ago
> effectively skim off of the top of the market The problem with this point of view is that it implies they are just taking, and not providing. HFT provides a more accurate market price by providing liquidity at small price differences. Whether what they provide justifies their cost is another question though.
- nickpsecurity 10y ago
  It's algorithms guessing about something in nanoseconds with little context. Feels like that would reduce accurate pricing. Not a finance guy, though, so my intuition could be wrong.
  - kbenson 10y ago
    To make money, they have to be accurately pricing. If the spread on something was $0.50, meaning that there are people on record as willing to buy at $0.50 lower than others are on record as willing to sell, the real price is somewhere within that range. Presumably, the real value of the stock is somewhere in the middle, but we don't know, because there's not any transactions happening right now, and the real value of something is the value at which people are willing to exchange it. HFT firms provide liquidity, in a lot more transactions, and at smaller spreads than regular people are willing to do (because HFT firms can automate away much of the work). This results in a more accurate price (smaller spread), and you being more likely to sell at that price (even if it's to a HFT). At least, that's the theory. I'm not a finance guy, but I've followed it here for quite a while, and this is my general impression of it. I used to be fairly anti-HFT until I learned more about it. Now I'm somewhat ambivalent, except for the topic of rogue trading algorithms, which seem fairly dangerous, but the genie's out of the bottle.
    - Retric 10y ago
      One of the most useful HFT tools is to reduce liquidity. Doing this over an hour would cost ridiculous amounts of money, but cornering a specific exchange over 0.01 seconds is cheap and potentially profitable. Remember, if a HFT extracts money that means the actual seller and actual buyer's price never meets which means the market is not doing accurate price discovery instead providing two prices separated by fractions of a second.
gnaritas 10y ago
> HFT being a lot about using computers to gain tiny information advantages (racing the speed of light between exchanges for example) to make perfectly safe arbitrages millions of times a day and effectively skim off of the top of the market. That's entirely wrong. There's nothing safe about it, and they aren't skimming, they're trading exactly like every other trader is, making a guess and risking cash to see if they're right.

sklogic 10y ago

Getting an information ahead of the rest of the crowd sort of fits under this specific meaning.

cubano 10y ago
Arbitrage has been around since the very beginnings of modern banking and provides a very important function to allow markets to accurately adjust to proper price signals.
gnaritas 10y ago
No it doesn't, insider trading means using non public information; not getting information faster which is and has always been a thing long before HFT ever existed. Information takes time to impact the market and always has and there's always been and always will be traders fighting traders to know that information first.