5 ms·

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 in

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".
caffeine 16y ago
They tested their software on 5 weeks of data from mid-2005, chosen because those weeks have no "atypical" movements. Which means that this algorithm would've been just as cooked as any human being would, no more and no less. The problem is that there does not (currently) exist any entity or human being smart enough to price stocks correctly. The effect appears so dramatic simply because markets move quickly, and the low transaction costs do little to damp the oscillations taking place. The "pain" caused by such sudden oscillations is certainly real, and can be thought of as shear stress as the financial system pulls on a slow-moving economy. But rather than arguing for damping the financial system, as you do, I would prefer to lower transaction costs in the rest of the economy. At some point, this becomes difficult: the bottleneck is human beings' capability to respond at high speed (that the financial sector lets computers do most of the trading nowadays is clear admission of this weakness). The only solution, then, is to let computers make all the other decisions in the economy as well. Hence, I propose a tax on all financial firms, to be deposited directly to the accounts of the Singularity Institute. (You may decide for yourself how much of the above you consider to be serious..)
patrickk 16y ago
The high frequency trading (HFT) systems that seemed to cause the drop you mention also make it more expensive for ordinary investors to actually buy stock in the first place, thereby minimizing your potential return (as Buffett says, "you profit when you buy" or something to that effect). There was an article on this a few weeks back where a guy in the know was explaining how such systems are a bad thing. Say you bid a price of $2 per share for a share that is currently at $1.92. Since the advent of HFTs, there's a much higher probability that the price you eventually pay will be a lot closer to $2 than to the current $1.92, (perhaps $1.98 or $1.99) whereas before HFTs you could get it closer to the current price. This matters particularly when you buy a lot of shares, and when you hold them for a long time, as the couple of cents difference compounds a lot over time. I'm not an expert on the subject, that was my takeaway from it.
- th0ma5 16y ago
  Rolling Stone had a great article last year, and their opinion was that once you boiled everything down, it sure did seem a lot like front-running.
  - gxti 16y ago
    Matt Taibbi has already proven that he can't tell a short sale from a hole in the ground. Perhaps Rolling Stone isn't the best place to be learning about markets. cf.: http://www.businessinsider.com/john-carney-matt-taibbi-falls-for-naked-short-selling-hoax-2009-10 http://www.businessinsider.com/john-carney-matt-taibbi-falls...
- graphene 16y ago
  That's quite different from the way I understand it. You have to specify more exactly what you mean when you say the current price is $1.92. Is it the current best (highest) bid, best (lowest) offer, or last traded price (this is generally the displayed price, but there is no guarantee that you can buy or sell at that price, since that depends on current outstanding offers and bids. Suppose the last traded price is $1.92, and the current best bid (highest price anyone is willing to pay) is $1.90 and the best offer (lowest price anyone is willing to sell) is $1.95. You can either decide to buy from the best offer or bid higher than the current best bid and hope to find a seller. Where HFT comes in is in that the increased amount of money and number of participants in the market tends to cause the difference between the best bid and best offer prices ("the spread") to go down, making it cheaper for everyone to enter and exit the market as they wish. This is the market making effect hugh3 referred to above. Please note I am not an expert and may turn out to be wrong on some of this.
leelin 16y ago
The near instantaneous drop of 700 points is exactly why you need market makers. In normal times, dozens of computer algorithms are posting bids to buy and offers to sell stock, at slightly more profitable prices than what their algorithm determines is the fair value. On the day in question, the algorithms' "oh crap" mode kicked in, the bots no longer felt they had a grasp on fair value, and decided to withdraw all their bids and offers. Now whoever was left trying to sell (like all the people with STOP orders) had to do so in an environment with very few counterparties. The stock exchanges give these market maker bots a few special privileges in return for them providing liquidity regularly. It varies by exchange, but one example is a market maker must quote a spread of no greater than 10 cents, and provide both a bid and offer at least 99% of the time. In return, the market maker gets a special spot in line when orders come through (think of it as first dibbs on certain proposed orders). So it sounds like we should either blame the guys who put in market stop orders, or we should blame the exchanges for not requiring more strict rules for their market makers (like 100% uptime). You can't blame the algorithms for wisely using the 1% of the time they are allowed to hide and wait for more opportune times.
- yummyfajitas 16y ago
  On the day in question, the algorithms' "oh crap" mode kicked in, the bots no longer felt they had a grasp on fair value, and decided to withdraw all their bids and offers. The algorithms were not turned off because they didn't work. They algorithms were turned off because everyone knew the exchanges were going to break trades. If your smart algorithm finds the bottom at 10, buys, sells at 20, and the market goes up to 30, you just made $10, right ($20-$10)? If the exchanges break your trade at 10, you are now short the stock at $20, and the current price is $30! Unfortunately, it's impossible to predict whether the trade will be broken; it's a human making that decision. Incidentally, most high frequency traders get no special privileges. There are a few that do (the ones you describe), but they are special cases rather than the general circumstance.
  - leelin 16y ago
    I agree with you, and in cases where the HFT bot gets no special privileges, then they are under absolutely no obligation to be there when hell is breaking loose. Why is everyone so mad at the bots for playing it safe and deciding not to trade?
BrentRitterbeck 16y ago
The thing with the flash crash is this: the market dropped 1K points immediately because the computers and their operators refused to provide liquidity when the initial suspicious trades hit the wire. While the event may have been caused by a computer, the extent of the drop was more because computers pulled themselves from the market than because high-frequency trading is somehow financially evil. I think people need to understand that a lot of the high-frequency trading actually helps to stabilize the market. What you saw during the flash crash is what happens when liquidity dries up because the computers are not trading.

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".

caffeine 16y ago

They tested their software on 5 weeks of data from mid-2005, chosen because those weeks have no "atypical" movements. Which means that this algorithm would've been just as cooked as any human being would, no more and no less. The problem is that there does not (currently) exist any entity or human being smart enough to price stocks correctly. The effect appears so dramatic simply because markets move quickly, and the low transaction costs do little to damp the oscillations taking place. The "pain" caused by such sudden oscillations is certainly real, and can be thought of as shear stress as the financial system pulls on a slow-moving economy. But rather than arguing for damping the financial system, as you do, I would prefer to lower transaction costs in the rest of the economy. At some point, this becomes difficult: the bottleneck is human beings' capability to respond at high speed (that the financial sector lets computers do most of the trading nowadays is clear admission of this weakness). The only solution, then, is to let computers make all the other decisions in the economy as well. Hence, I propose a tax on all financial firms, to be deposited directly to the accounts of the Singularity Institute. (You may decide for yourself how much of the above you consider to be serious..)

patrickk 16y ago

The high frequency trading (HFT) systems that seemed to cause the drop you mention also make it more expensive for ordinary investors to actually buy stock in the first place, thereby minimizing your potential return (as Buffett says, "you profit when you buy" or something to that effect). There was an article on this a few weeks back where a guy in the know was explaining how such systems are a bad thing. Say you bid a price of $2 per share for a share that is currently at $1.92. Since the advent of HFTs, there's a much higher probability that the price you eventually pay will be a lot closer to $2 than to the current $1.92, (perhaps $1.98 or $1.99) whereas before HFTs you could get it closer to the current price. This matters particularly when you buy a lot of shares, and when you hold them for a long time, as the couple of cents difference compounds a lot over time. I'm not an expert on the subject, that was my takeaway from it.

th0ma5 16y ago
Rolling Stone had a great article last year, and their opinion was that once you boiled everything down, it sure did seem a lot like front-running.
- gxti 16y ago
  Matt Taibbi has already proven that he can't tell a short sale from a hole in the ground. Perhaps Rolling Stone isn't the best place to be learning about markets. cf.: http://www.businessinsider.com/john-carney-matt-taibbi-falls-for-naked-short-selling-hoax-2009-10 http://www.businessinsider.com/john-carney-matt-taibbi-falls...
graphene 16y ago
That's quite different from the way I understand it. You have to specify more exactly what you mean when you say the current price is $1.92. Is it the current best (highest) bid, best (lowest) offer, or last traded price (this is generally the displayed price, but there is no guarantee that you can buy or sell at that price, since that depends on current outstanding offers and bids. Suppose the last traded price is $1.92, and the current best bid (highest price anyone is willing to pay) is $1.90 and the best offer (lowest price anyone is willing to sell) is $1.95. You can either decide to buy from the best offer or bid higher than the current best bid and hope to find a seller. Where HFT comes in is in that the increased amount of money and number of participants in the market tends to cause the difference between the best bid and best offer prices ("the spread") to go down, making it cheaper for everyone to enter and exit the market as they wish. This is the market making effect hugh3 referred to above. Please note I am not an expert and may turn out to be wrong on some of this.

leelin 16y ago

The near instantaneous drop of 700 points is exactly why you need market makers. In normal times, dozens of computer algorithms are posting bids to buy and offers to sell stock, at slightly more profitable prices than what their algorithm determines is the fair value. On the day in question, the algorithms' "oh crap" mode kicked in, the bots no longer felt they had a grasp on fair value, and decided to withdraw all their bids and offers. Now whoever was left trying to sell (like all the people with STOP orders) had to do so in an environment with very few counterparties. The stock exchanges give these market maker bots a few special privileges in return for them providing liquidity regularly. It varies by exchange, but one example is a market maker must quote a spread of no greater than 10 cents, and provide both a bid and offer at least 99% of the time. In return, the market maker gets a special spot in line when orders come through (think of it as first dibbs on certain proposed orders). So it sounds like we should either blame the guys who put in market stop orders, or we should blame the exchanges for not requiring more strict rules for their market makers (like 100% uptime). You can't blame the algorithms for wisely using the 1% of the time they are allowed to hide and wait for more opportune times.

yummyfajitas 16y ago
On the day in question, the algorithms' "oh crap" mode kicked in, the bots no longer felt they had a grasp on fair value, and decided to withdraw all their bids and offers. The algorithms were not turned off because they didn't work. They algorithms were turned off because everyone knew the exchanges were going to break trades. If your smart algorithm finds the bottom at 10, buys, sells at 20, and the market goes up to 30, you just made $10, right ($20-$10)? If the exchanges break your trade at 10, you are now short the stock at $20, and the current price is $30! Unfortunately, it's impossible to predict whether the trade will be broken; it's a human making that decision. Incidentally, most high frequency traders get no special privileges. There are a few that do (the ones you describe), but they are special cases rather than the general circumstance.
- leelin 16y ago
  I agree with you, and in cases where the HFT bot gets no special privileges, then they are under absolutely no obligation to be there when hell is breaking loose. Why is everyone so mad at the bots for playing it safe and deciding not to trade?

BrentRitterbeck 16y ago

The thing with the flash crash is this: the market dropped 1K points immediately because the computers and their operators refused to provide liquidity when the initial suspicious trades hit the wire. While the event may have been caused by a computer, the extent of the drop was more because computers pulled themselves from the market than because high-frequency trading is somehow financially evil. I think people need to understand that a lot of the high-frequency trading actually helps to stabilize the market. What you saw during the flash crash is what happens when liquidity dries up because the computers are not trading.