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The entire movement against automated / high frequency trading is a hoax. Remember how much Dick Grasso was paid as head of the NYSE? Typical exchanges charge

The entire movement against automated / high frequency trading is a hoax. Remember how much Dick Grasso was paid as head of the NYSE? Typical exchanges charge substantial membership fees and reap massive profits. In the age of computers the traditional exchange becomes a lot less valuable, since it's easy to match buyers and sellers over any computer network. The law requiring all trades to be filled at the lowest price was motivated by major exchanges not wanting to be cut out of the action (even though a trader might be OK with getting not quite the lowest price in exchange for much lower transaction fees overall). Also, the majority of HFT platforms run off of the major exchanges on private networks that only sometimes pass orders on to the rest of the market. The more liquidity/volume occurs on these smaller networks, the less relevant the older established players (NYSE, NASDAQ) become. Exchanges have traditionally been gatekeepers charging fees to use their monopoly product. This battle has been going on for a long time (and so far the upstarts have been winning in spite of the hurdles imposed by the influential old timers). FUD about algorithm based trading strategies is just a part of this larger battle and it's 100% nonsense.

nl 17y ago
I mostly agree with this. I do think that there seem to be some problems with the "PRICE TIME" rule. My understanding is that is supposed to mean that if two orders get placed at the same price, then the one placed first gets filled first. However, it appears possible for some players to work around this rule and jump in first. That seems unfair to me. Tradeworx says this too: Jumping ahead of an order that was placed earlier at the same price by another trader is an UNFAIR practice, because it undermines the principle of PRICE-TIME priority on which our equity markets are premised Unfortunately, this UNFAIR practice is widespread, due to a deficiency in Rule 611 of Regulation NMS HFTs should not be blamed for exploiting it – in fact, many HFTs who exploit this deficiency do so unwittingly Instead, the regulators should work to correct this deficiency in the market structure ASAP ! (page 17, http://sec.gov/comments/s7-02-10/s70210-129.pdf http://sec.gov/comments/s7-02-10/s70210-129.pdf)
joe_the_user 17y ago
Hmm, So it doesn't bother you that this "investment" doesn't have any relation to building productive enterprises of any sort? One might might think that the nastiness of 2008 would wake people up to the idea that markets can generate destructive speculation as well as constructive investment. But fixed ideas mostly resist reality. And contrasting the NYSE profiteering to high frequency profiteering is kind of false argument. It's more a matter that deregulation has been a disaster and the situation cries for a modern version of re-regulation - except that the inmates are still well in control of the asylum.
- kjhgfghjk 17y ago
  And you picture the other traders physically on the NYSE as the bank manager in "A Wonderfull Life"?
- snewe 17y ago
  > So it doesn't bother you that this "investment" doesn't have any relation to building productive enterprises of any sort? As the article points out, these firms provide liquidity which makes trading faster and cheaper. Theoretically, more liquidity should also make it easier to move capital to the most profitable enterprises.
  - milkshakes 17y ago
    As the article points out, these firms provide liquidity which makes trading faster and cheaper. Theoretically, more liquidity should also make it easier to move capital to the most profitable enterprises. Actually, the article suggests that the firms pulled out of the market, and that their actions amplified the crash. HFT is a zero sum game, and these firms just demonstrated that they exist to extract value from the market, not provide it liquidity. [edit]:Though there are obvious differences, I feel like HFT in general is just another form of side betting, alarmingly similar, in principle to CDOs and other derivatives, in at least a few ways. They're exotic, and theirfore unregulated, they dwarf and therefore distort "real" market activity, and they appear to provide value, but the geniuses behind them underestimate the risk because they can never account for all the possible black swan events. When "real" markets depend on these educated guesses, and the guesses turn out to be wrong, the real markets suffer. Sure we know how to create fancy new financial products to back up these guesses, and exploit the leverage provided by developments in math and computer science, but the fact remains that we still can't even identify, let alone account for what we don't know. The good news is that because these particular bets are shorter term, in this case the immediate damage is reversible, though their were definitely consequences that were irreversible, and if we keep allowing our equity markets get pushed around by HFT, the next time the system hiccups, the irreversible consequences may spiral out of control. But I don't have a very deep finance background. I'd love to hear thoughts from some people who do.
swah 17y ago
What if HFT systems exploit the fact that they have access to the information a few ms before the rest of the market?
- grandalf 17y ago
  The only information they have is about trades that are about to hit their private trading network (before they go out to the market as a whole). It would seem to me that if this were a problem, private networks would emerge that either disallowed the look-ahead option or allowed the party placing an order to declare it off limits to look-ahead (which would probably result in an increased transaction fee). So in other words, the only time this could really result in exploitation is if one party lacked the wherewithal to use a different trading network (or a large trade broker) when trying to do a large transaction a few shares at a time. This seems like the sort of thing that would attract innovation and would be fixed before anyone could blink, as trading network firms realized they could make more money by offering both options. My guess is that the lowered fees available in the sort of ecosystem that exists today would limit the demand for a trading network that disallowed it. After all the feature was added on as a desirable product fairly recently and nobody complained about it... until HFT became the scapegoat du jour for the financial crisis.
DanielBMarkham 17y ago
I had never thought of this before. HFT provide liquidity. With enough of them, you really don't need a NYSE any more. After all, they're doing the same thing the exchange does. Now all the attention to HFT makes a lot more sense. The logic never added up, but the politics obviously do. Thank you.

nl 17y ago

I mostly agree with this. I do think that there seem to be some problems with the "PRICE TIME" rule. My understanding is that is supposed to mean that if two orders get placed at the same price, then the one placed first gets filled first. However, it appears possible for some players to work around this rule and jump in first. That seems unfair to me. Tradeworx says this too: Jumping ahead of an order that was placed earlier at the same price by another trader is an UNFAIR practice, because it undermines the principle of PRICE-TIME priority on which our equity markets are premised Unfortunately, this UNFAIR practice is widespread, due to a deficiency in Rule 611 of Regulation NMS HFTs should not be blamed for exploiting it – in fact, many HFTs who exploit this deficiency do so unwittingly Instead, the regulators should work to correct this deficiency in the market structure ASAP ! (page 17, http://sec.gov/comments/s7-02-10/s70210-129.pdf http://sec.gov/comments/s7-02-10/s70210-129.pdf)

joe_the_user 17y ago

Hmm, So it doesn't bother you that this "investment" doesn't have any relation to building productive enterprises of any sort? One might might think that the nastiness of 2008 would wake people up to the idea that markets can generate destructive speculation as well as constructive investment. But fixed ideas mostly resist reality. And contrasting the NYSE profiteering to high frequency profiteering is kind of false argument. It's more a matter that deregulation has been a disaster and the situation cries for a modern version of re-regulation - except that the inmates are still well in control of the asylum.

kjhgfghjk 17y ago
And you picture the other traders physically on the NYSE as the bank manager in "A Wonderfull Life"?
snewe 17y ago
> So it doesn't bother you that this "investment" doesn't have any relation to building productive enterprises of any sort? As the article points out, these firms provide liquidity which makes trading faster and cheaper. Theoretically, more liquidity should also make it easier to move capital to the most profitable enterprises.
- milkshakes 17y ago
  As the article points out, these firms provide liquidity which makes trading faster and cheaper. Theoretically, more liquidity should also make it easier to move capital to the most profitable enterprises. Actually, the article suggests that the firms pulled out of the market, and that their actions amplified the crash. HFT is a zero sum game, and these firms just demonstrated that they exist to extract value from the market, not provide it liquidity. [edit]:Though there are obvious differences, I feel like HFT in general is just another form of side betting, alarmingly similar, in principle to CDOs and other derivatives, in at least a few ways. They're exotic, and theirfore unregulated, they dwarf and therefore distort "real" market activity, and they appear to provide value, but the geniuses behind them underestimate the risk because they can never account for all the possible black swan events. When "real" markets depend on these educated guesses, and the guesses turn out to be wrong, the real markets suffer. Sure we know how to create fancy new financial products to back up these guesses, and exploit the leverage provided by developments in math and computer science, but the fact remains that we still can't even identify, let alone account for what we don't know. The good news is that because these particular bets are shorter term, in this case the immediate damage is reversible, though their were definitely consequences that were irreversible, and if we keep allowing our equity markets get pushed around by HFT, the next time the system hiccups, the irreversible consequences may spiral out of control. But I don't have a very deep finance background. I'd love to hear thoughts from some people who do.

swah 17y ago

What if HFT systems exploit the fact that they have access to the information a few ms before the rest of the market?

grandalf 17y ago
The only information they have is about trades that are about to hit their private trading network (before they go out to the market as a whole). It would seem to me that if this were a problem, private networks would emerge that either disallowed the look-ahead option or allowed the party placing an order to declare it off limits to look-ahead (which would probably result in an increased transaction fee). So in other words, the only time this could really result in exploitation is if one party lacked the wherewithal to use a different trading network (or a large trade broker) when trying to do a large transaction a few shares at a time. This seems like the sort of thing that would attract innovation and would be fixed before anyone could blink, as trading network firms realized they could make more money by offering both options. My guess is that the lowered fees available in the sort of ecosystem that exists today would limit the demand for a trading network that disallowed it. After all the feature was added on as a desirable product fairly recently and nobody complained about it... until HFT became the scapegoat du jour for the financial crisis.

DanielBMarkham 17y ago

I had never thought of this before. HFT provide liquidity. With enough of them, you really don't need a NYSE any more. After all, they're doing the same thing the exchange does. Now all the attention to HFT makes a lot more sense. The logic never added up, but the politics obviously do. Thank you.