7 ms·

Market making. Suppose I decide I want to buy 3000 shares of IBM right now. I'll have made the trade within minutes, because I'll probably have bought it from a

by hugh3 16y ago

Market making. Suppose I decide I want to buy 3000 shares of IBM right now. I'll have made the trade within minutes, because I'll probably have bought it from a computer which holds shares for twenty minutes. Four years later, when I want to sell, I can sell it within minutes too, because I'll be selling it to another computer that will probably sell 'em off to a series of other computers, before eventually winding up in the pocket of another long-term investor. If long-term investors were the only ones buying and selling shares it would be much more difficult to buy and sell shares when you wanted to. Net result: shares are a less attractive investment, IPOs raise less, economy suffers.

solutionyogi 16y ago
I would call it 'Liquidity'. And there are instruments where you are locked in for certain period of time e.g. 10 year treasury bonds. Luckily, there is an after market for treasury bonds where you can sell them after buying well before the 10 years are over. And what you are proposing is that we should only allow Investing and restrict/remove trading. The problem with this approach is that you lose your ability to find 'market value' for your investment on an everyday basis. Let's say we force everyone to hold stock for at least a month. What if I had bought BP stock just before the gulf oil spill news came out? I will be stuck and would have to incur a huge loss by the time I am allowed to sell my stock. Also, there are thousands of investors and they may need to liquidate their position at any time based on their own circumstances. And finally, stock market does achieve their goal of allowing company to raise capital. Theoretically, it doesn't matter what happens to the stock price after company has issued their common stock. They got their capital and can do what they want with it. On practical basis, company do care about their stock price for numerous reasons which I won't get into right now.
- eru 16y ago
  > And finally, stock market does achieve their goal of allowing company to raise capital. Theoretically, it doesn't matter what happens to the stock price after company has issued their common stock. They got their capital and can do what they want with it. On practical basis, company do care about their stock price for numerous reasons which I won't get into right now. Yes, and No. It's backwards. There's no `company' which can care or not care about its stock price. The company, as a legal person, can't really care about anything at all. And after the IPO the shareholders are the new owners of the company, so they do (or should) care about what happens to the company.
Eliezer 16y ago
Bull. Life would go on.
- carbocation 16y ago
  I agree with you. It seems more likely that without these machines, I'd have to wait a small amount of time longer (probably on the order of minutes, though I clearly can't test this empirically) to execute a trade. Also, welcome back.
- houseabsolute 16y ago
  Life would go on without the stock market. Life will continue to go on with the status quo. Life would go on if the changes you presumably want were to be implemented. It's not a question of whether life will go on. It's a question of whether it would go on better or worse than it does now.
- hugh3 16y ago
  Of course it would, just slightly worse. I'm not sure this is much of an argument. The question is cost/benefit of prohibiting short-term transactions. So far I'm sure there's a cost, unconvinced there's a benefit, and suspecting that a lot of the opposition to it is based on the natural human urge to be jealous when other people make money by doing no apparent work.
- Tichy 16y ago
  Yeah, did they even have a stock market in the communist sowjet union? I hear living conditions have been fantastic there.
  - eru 16y ago
    The communists also ate potatoes.. So potatoes must be awful, too.
    - Tichy 16y ago
      Sorry, your logic is flawed.
jfager 16y ago
Automated trading is a tax on transactions, not a lubricant. The machines jump in front of trades between willing "real" buyers and sellers and screw both (or one or the other, depending on the transaction). There are entire companies that now exist solely to try to hide the large trades that actual long-term investors (pension funds, etc) need or want to make, so that the computers can't pick up the signal and pounce in between.
- joshu 16y ago
  You have no idea what you are talking about. That's a small part of automated trading. Honestly, if you are buying stocks long-term, you probably aren't focusing on short-term pricing changes. Large institutional investors can and do trade off-market entirely via Posit, block desks, other dark pools, etc. But yes, you do not make large trades transparently in the marketplace, because people will take advantage of that. There is no way to trade without leaking information as well. (FWIW, I worked on an automated execution desk.)
  - jfager 16y ago
    You have no idea what you are talking about. FWIW, I work at a risk analytics company. And if you worked on an automated execution desk, please excuse me for suggesting that you may be more inclined to see and emphasize the positives of what you do every day. I fully admit that I'm probably more inclined to see the negatives, but if you're really suggesting they aren't there, you're kidding yourself. That's a small part of automated trading. It's a small part of automated trading, but reading the news to pounce on something and holding it for only 20 minutes clearly falls in that small part. We're obviously not talking about filling stop loss orders and the like. Honestly, if you are buying stocks long-term, you probably aren't focusing on short-term pricing changes. That's just wrong. Funds are compelled to make transactions for a wide variety of reasons all the time. They are very interested in what happens to prices when they start to move to fulfill those obligations. Large institutional investors can and do trade off-market entirely via Posit, block desks, other dark pools, etc. "Can and do" does not mean "always and only". But yes, you do not make large trades transparently in the marketplace, because people will take advantage of that. There is no way to trade without leaking information as well. But the point is that automated trading systems are far more sensitive to that information, and can act on it much more quickly, meaning the methods to minimize the transparency of a large trade have to become more and more sophisticated, meaning more investment in those methods == tax.
rauljara 16y ago
Thank you. That was the explanation I was looking for. My next question then, is whether this flexibility to sell instantaneously is worth the risk of near instantaneous drops of 700+ points in the dow, as happened a couple of weeks ago. My gut tells me that letting computers have a free run of it is not good. But I'm definitely open to being convinced otherwise. And I'm definitely open to a better solution than you have to hold on to stocks for a month or more.
- hugh3 16y ago
  Well, the near-instantaneous drop we saw a few weeks ago is something that has happened exactly once in history. It will probably never happen again, at least not in the same form, since people have probably gone and changed their software to avoid it. And its consequences, in the end, weren't all that bad -- mostly a bunch of institutional investors made some money at the expense of some other institutional investors, but I haven't heard of anybody getting wiped out. So I'm inclined to pick the free-market devil I know over the government-controlled devil I don't.
  - joe_the_user 16y ago
    America's greatest period of growth, the 1950-1973 expansion, took place within a highly regulated financial system. The "devil" of returning to that level of regulation hardly seems unknown.
    - djb_hackernews 16y ago
      correlation causation blah. playing devils advocate, imagine how much more we would have grown had the financial system been unregulated.
      - joe_the_user 16y ago
        My point was that a regulated financial system is hardly an unknown, whether "devil" or not. Indeed, high frequency trading seems like far more of an unknown and giving good evidence so far of being a "devil".
skybrian 16y ago
Why does any reasonable investor need to sell within minutes? What does this solve that a giant daily auction wouldn't solve? It seems to me the only reason such speed is necessary is to beat everyone else, and that's only necessary because everyone else does it.
- regularfry 16y ago
  Why would a giant daily auction not also be subject to speed effects? There'd be a measurable advantage to being able to submit your daily order as late as possible, surely?
  - skybrian 16y ago
    Yes, but only when significant news happens at the last minute. (Think about why companies release earnings after the market closes.)
joe_the_user 16y ago
I think we saw in a ah ... little ... incident some weeks ago that high frequency traders are rather problematic market makers (700 point drop, some stocks reduced to 0, etc, remember?).

by hugh3 16y ago

solutionyogi 16y ago

I would call it 'Liquidity'. And there are instruments where you are locked in for certain period of time e.g. 10 year treasury bonds. Luckily, there is an after market for treasury bonds where you can sell them after buying well before the 10 years are over. And what you are proposing is that we should only allow Investing and restrict/remove trading. The problem with this approach is that you lose your ability to find 'market value' for your investment on an everyday basis. Let's say we force everyone to hold stock for at least a month. What if I had bought BP stock just before the gulf oil spill news came out? I will be stuck and would have to incur a huge loss by the time I am allowed to sell my stock. Also, there are thousands of investors and they may need to liquidate their position at any time based on their own circumstances. And finally, stock market does achieve their goal of allowing company to raise capital. Theoretically, it doesn't matter what happens to the stock price after company has issued their common stock. They got their capital and can do what they want with it. On practical basis, company do care about their stock price for numerous reasons which I won't get into right now.

eru 16y ago
> And finally, stock market does achieve their goal of allowing company to raise capital. Theoretically, it doesn't matter what happens to the stock price after company has issued their common stock. They got their capital and can do what they want with it. On practical basis, company do care about their stock price for numerous reasons which I won't get into right now. Yes, and No. It's backwards. There's no `company' which can care or not care about its stock price. The company, as a legal person, can't really care about anything at all. And after the IPO the shareholders are the new owners of the company, so they do (or should) care about what happens to the company.

Eliezer 16y ago

Bull. Life would go on.

carbocation 16y ago
I agree with you. It seems more likely that without these machines, I'd have to wait a small amount of time longer (probably on the order of minutes, though I clearly can't test this empirically) to execute a trade. Also, welcome back.
houseabsolute 16y ago
Life would go on without the stock market. Life will continue to go on with the status quo. Life would go on if the changes you presumably want were to be implemented. It's not a question of whether life will go on. It's a question of whether it would go on better or worse than it does now.
hugh3 16y ago
Of course it would, just slightly worse. I'm not sure this is much of an argument. The question is cost/benefit of prohibiting short-term transactions. So far I'm sure there's a cost, unconvinced there's a benefit, and suspecting that a lot of the opposition to it is based on the natural human urge to be jealous when other people make money by doing no apparent work.
Tichy 16y ago
Yeah, did they even have a stock market in the communist sowjet union? I hear living conditions have been fantastic there.
- eru 16y ago
  The communists also ate potatoes.. So potatoes must be awful, too.
  - Tichy 16y ago
    Sorry, your logic is flawed.

jfager 16y ago

Automated trading is a tax on transactions, not a lubricant. The machines jump in front of trades between willing "real" buyers and sellers and screw both (or one or the other, depending on the transaction). There are entire companies that now exist solely to try to hide the large trades that actual long-term investors (pension funds, etc) need or want to make, so that the computers can't pick up the signal and pounce in between.

joshu 16y ago
You have no idea what you are talking about. That's a small part of automated trading. Honestly, if you are buying stocks long-term, you probably aren't focusing on short-term pricing changes. Large institutional investors can and do trade off-market entirely via Posit, block desks, other dark pools, etc. But yes, you do not make large trades transparently in the marketplace, because people will take advantage of that. There is no way to trade without leaking information as well. (FWIW, I worked on an automated execution desk.)
- jfager 16y ago
  You have no idea what you are talking about. FWIW, I work at a risk analytics company. And if you worked on an automated execution desk, please excuse me for suggesting that you may be more inclined to see and emphasize the positives of what you do every day. I fully admit that I'm probably more inclined to see the negatives, but if you're really suggesting they aren't there, you're kidding yourself. That's a small part of automated trading. It's a small part of automated trading, but reading the news to pounce on something and holding it for only 20 minutes clearly falls in that small part. We're obviously not talking about filling stop loss orders and the like. Honestly, if you are buying stocks long-term, you probably aren't focusing on short-term pricing changes. That's just wrong. Funds are compelled to make transactions for a wide variety of reasons all the time. They are very interested in what happens to prices when they start to move to fulfill those obligations. Large institutional investors can and do trade off-market entirely via Posit, block desks, other dark pools, etc. "Can and do" does not mean "always and only". But yes, you do not make large trades transparently in the marketplace, because people will take advantage of that. There is no way to trade without leaking information as well. But the point is that automated trading systems are far more sensitive to that information, and can act on it much more quickly, meaning the methods to minimize the transparency of a large trade have to become more and more sophisticated, meaning more investment in those methods == tax.

rauljara 16y ago

Thank you. That was the explanation I was looking for. My next question then, is whether this flexibility to sell instantaneously is worth the risk of near instantaneous drops of 700+ points in the dow, as happened a couple of weeks ago. My gut tells me that letting computers have a free run of it is not good. But I'm definitely open to being convinced otherwise. And I'm definitely open to a better solution than you have to hold on to stocks for a month or more.

hugh3 16y ago
Well, the near-instantaneous drop we saw a few weeks ago is something that has happened exactly once in history. It will probably never happen again, at least not in the same form, since people have probably gone and changed their software to avoid it. And its consequences, in the end, weren't all that bad -- mostly a bunch of institutional investors made some money at the expense of some other institutional investors, but I haven't heard of anybody getting wiped out. So I'm inclined to pick the free-market devil I know over the government-controlled devil I don't.
- joe_the_user 16y ago
  America's greatest period of growth, the 1950-1973 expansion, took place within a highly regulated financial system. The "devil" of returning to that level of regulation hardly seems unknown.
  - djb_hackernews 16y ago
    correlation causation blah. playing devils advocate, imagine how much more we would have grown had the financial system been unregulated.
    - joe_the_user 16y ago
      My point was that a regulated financial system is hardly an unknown, whether "devil" or not. Indeed, high frequency trading seems like far more of an unknown and giving good evidence so far of being a "devil".

skybrian 16y ago

Why does any reasonable investor need to sell within minutes? What does this solve that a giant daily auction wouldn't solve? It seems to me the only reason such speed is necessary is to beat everyone else, and that's only necessary because everyone else does it.

regularfry 16y ago
Why would a giant daily auction not also be subject to speed effects? There'd be a measurable advantage to being able to submit your daily order as late as possible, surely?
- skybrian 16y ago
  Yes, but only when significant news happens at the last minute. (Think about why companies release earnings after the market closes.)

joe_the_user 16y ago

I think we saw in a ah ... little ... incident some weeks ago that high frequency traders are rather problematic market makers (700 point drop, some stocks reduced to 0, etc, remember?).