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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

by 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.
  - joshu 16y ago
    I'd assumed you mean "jumping in front" meant flash orders. I don't think a lot of automated trading systems actually read news, so I didn't assume you meant that. I think that if you are holding for a long time, you probably don't care as much about the difference of a few pennies. The alpha due to long term trades needs be much larger than short term volatility to be able to make a profit. Whereas a lot of high speed trading folks seem to be trading around the volatility and short-term moves. I'm not really speaking about things about positives vs negatives. There's really no way to balance all of the desires you want. I think the fairest thing to do would be to have a once-a-day crossing for the stocks. But this would take away continuous trading, which has other advantages. (More specifically, I worked in a group that did automated trading for other parties. Probably mostly like the big folks you were talking about. However, I worked mostly in proprietary trading strategies directly. A good chunk of it involved risk model improvements.)
    - jfager 16y ago
      Flash orders are weapons used on both sides of the arms race. I was just referring to the 'legal frontrunning' a lot of these algorithms are trying to achieve. A few pennies? What do you mean by that? High speed trading only nets fractions of a cent per trade, yes, but by the time a big order actually gets filled, you could be talking a few pennies per share, or more. Another part of the tax that I'm referring to is the cost of keeping pace in the arms race (or hiring people to do it for you). That certainly makes a difference to the kind of low-margin funds that might be trading because they have to more than because they want to, which also happen to be the kind of funds that most people who don't realize they're invested in the stock market are invested in (which is where the positives and negatives come in, imo).
blacksmythe 16y ago
<< Automated trading is a tax on transactions, not a lubricant. That is a good analogy. There is a long-term trend to the stock market, but in the short term it is a zero-sum game. If a group manage to profit an average of 1% on every trade, everyone else's profits go down 1%. If you buy and hold for 5 years, this works out to 0.2%/year, so you may not care - but you should.
yummyfajitas 16y ago
It is simply not possible to "jump in front" of trades, except by offering a better price. If you place your order first, it will be filled before my order unless I outbid you.
- jfager 16y ago
  If you have a big enough order, it has to be made across multiple trades. If people start seeing one buyer chasing a bunch of shares across multiple trades, they'll start hoarding and drive the price up. That's how a lot of these algorithms make their money, by noticing these large buys more accurately and quickly than anyone else and stepping in the middle.

by jfager 16y ago

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.
- joshu 16y ago
  I'd assumed you mean "jumping in front" meant flash orders. I don't think a lot of automated trading systems actually read news, so I didn't assume you meant that. I think that if you are holding for a long time, you probably don't care as much about the difference of a few pennies. The alpha due to long term trades needs be much larger than short term volatility to be able to make a profit. Whereas a lot of high speed trading folks seem to be trading around the volatility and short-term moves. I'm not really speaking about things about positives vs negatives. There's really no way to balance all of the desires you want. I think the fairest thing to do would be to have a once-a-day crossing for the stocks. But this would take away continuous trading, which has other advantages. (More specifically, I worked in a group that did automated trading for other parties. Probably mostly like the big folks you were talking about. However, I worked mostly in proprietary trading strategies directly. A good chunk of it involved risk model improvements.)
  - jfager 16y ago
    Flash orders are weapons used on both sides of the arms race. I was just referring to the 'legal frontrunning' a lot of these algorithms are trying to achieve. A few pennies? What do you mean by that? High speed trading only nets fractions of a cent per trade, yes, but by the time a big order actually gets filled, you could be talking a few pennies per share, or more. Another part of the tax that I'm referring to is the cost of keeping pace in the arms race (or hiring people to do it for you). That certainly makes a difference to the kind of low-margin funds that might be trading because they have to more than because they want to, which also happen to be the kind of funds that most people who don't realize they're invested in the stock market are invested in (which is where the positives and negatives come in, imo).

blacksmythe 16y ago

<< Automated trading is a tax on transactions, not a lubricant. That is a good analogy. There is a long-term trend to the stock market, but in the short term it is a zero-sum game. If a group manage to profit an average of 1% on every trade, everyone else's profits go down 1%. If you buy and hold for 5 years, this works out to 0.2%/year, so you may not care - but you should.

yummyfajitas 16y ago

It is simply not possible to "jump in front" of trades, except by offering a better price. If you place your order first, it will be filled before my order unless I outbid you.

jfager 16y ago
If you have a big enough order, it has to be made across multiple trades. If people start seeing one buyer chasing a bunch of shares across multiple trades, they'll start hoarding and drive the price up. That's how a lot of these algorithms make their money, by noticing these large buys more accurately and quickly than anyone else and stepping in the middle.