8 ms·

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 t

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.
SkyMarshal 16y ago
Basically what the HFT algorithms do is probe orders for their market limits. Say you want to buy your 3000 shares, and you don't want to spend more than $20/share, so you enter your bid with a $20 limit. Your limit is supposed to be invisible to the market, only you and your dealer know it. But the HFT algorithms have a way to probe your order and uncover your limit. The stock is currently trading around $15, so your order hits the exchange, and in the first few milliseconds, a HFT computer makes a micro-offer for 10 shares at $16, then 10 shares at $17, then 10 shares $20, then 10 shares at $21. When the last offer is rejected b/c it's over your limit, the computer then guesses your limit is $20 and offers to sell you 2960 shares at your limit of $20. All this happens in just a few milliseconds, and it just cost you roughly (2960x20 + $20 + $17 + $16 + $15) - (3000 x $15) = 59,268 - 45,000 = $14,268. That's 30% more than you would have paid had you been able to execute at $15. It's basically cheating, and should be made illegal. Just one more example of how our markets are rigged.
- jrockway 16y ago
  Of course, if your limit was $15, it would have executed at $15. Or not at all, in which case $15 was not the asking price. Remember, the price is a two-way street. It's what you are willing to pay, and it's what the seller is willing to sell for. If you say, "I would like to buy at $20" and your partner says "$20 is fine with me too", and the trade happens at $20, then the market is working perfectly. You could have gotten a better deal, but it's not what you asked for.
  - SkyMarshal 16y ago
    The problem is, you're not telling your partner 'I would like to buy at $20'. You're telling him 'I would like to buy at $15', but as in any negotiation you have a max price you are willing to pay and he has a minimum price he is willing to sell, but neither of you announces that to each other. However, he basically has the ability to read your mind and see that he can negotiate you up to $20, while you lack the same ability to reciprocate. It's an unfair advantage enabled by large firms having the money to buy better access to market mechanisms and powerful enough computers to exploit them.
BrentRitterbeck 16y ago
If you still pay $2 for a share, is that not the going market price? You don't have to submit a market order. If you wanted the shares at $1.92, you could have submitted a limit order. This is all supply and demand; it's just price discovery happens at a much higher frequency. It is no different than being charged extra for staying at a hotel during the holiday season. The price changes just happen much more frequently and much more quickly.

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.

SkyMarshal 16y ago

Basically what the HFT algorithms do is probe orders for their market limits. Say you want to buy your 3000 shares, and you don't want to spend more than $20/share, so you enter your bid with a $20 limit. Your limit is supposed to be invisible to the market, only you and your dealer know it. But the HFT algorithms have a way to probe your order and uncover your limit. The stock is currently trading around $15, so your order hits the exchange, and in the first few milliseconds, a HFT computer makes a micro-offer for 10 shares at $16, then 10 shares at $17, then 10 shares $20, then 10 shares at $21. When the last offer is rejected b/c it's over your limit, the computer then guesses your limit is $20 and offers to sell you 2960 shares at your limit of $20. All this happens in just a few milliseconds, and it just cost you roughly (2960x20 + $20 + $17 + $16 + $15) - (3000 x $15) = 59,268 - 45,000 = $14,268. That's 30% more than you would have paid had you been able to execute at $15. It's basically cheating, and should be made illegal. Just one more example of how our markets are rigged.

jrockway 16y ago
Of course, if your limit was $15, it would have executed at $15. Or not at all, in which case $15 was not the asking price. Remember, the price is a two-way street. It's what you are willing to pay, and it's what the seller is willing to sell for. If you say, "I would like to buy at $20" and your partner says "$20 is fine with me too", and the trade happens at $20, then the market is working perfectly. You could have gotten a better deal, but it's not what you asked for.
- SkyMarshal 16y ago
  The problem is, you're not telling your partner 'I would like to buy at $20'. You're telling him 'I would like to buy at $15', but as in any negotiation you have a max price you are willing to pay and he has a minimum price he is willing to sell, but neither of you announces that to each other. However, he basically has the ability to read your mind and see that he can negotiate you up to $20, while you lack the same ability to reciprocate. It's an unfair advantage enabled by large firms having the money to buy better access to market mechanisms and powerful enough computers to exploit them.

BrentRitterbeck 16y ago

If you still pay $2 for a share, is that not the going market price? You don't have to submit a market order. If you wanted the shares at $1.92, you could have submitted a limit order. This is all supply and demand; it's just price discovery happens at a much higher frequency. It is no different than being charged extra for staying at a hotel during the holiday season. The price changes just happen much more frequently and much more quickly.