4 ms·

Something like a minimum holding time is a more reasonable approach. However, there's not a clear cut answer in any case.

by dm3 9y ago

harryh 9y ago
Before you start talking about what would be effective in reducing the amount of high frequency trading you have to make the case that reducing HFT is a good goal in the first place. This is a challenging case to make.
- Jweb_Guru 9y ago
  Why is it challenging? What conceivable valuable function does front-running serve?
  - dsacco 9y ago
    High frequency trading is not front running. It's becoming truly kafkaesque how often this claim comes up on Hacker News.
    - theseatoms 9y ago
      Or kafkaesque how often these separate concepts are conflated in popular usage.
  - harryh 9y ago
    First you have to tell me what you think front running means. Originally front running had a very specific definition: Someone who has a fiduciary responsibility to me cannot use my trading interests to execute their own trades before they execute my trades. This sort of thing is clearly wrong because it can result in someone I've hired delivering subpar execution prices to me. However the term has expanded a lot over the years to mean a lot of different things to a lot of different people. So what does it mean to you?
  - gnaritas 9y ago
    You don't know what front-running means, and HFT's aren't doing it.
- netcan 9y ago
  These need to be discussed together. Otherwise, the defence of HFT tends to cite the economic damage caused by measures to reduce it. Anyway, I agree with you. I don’t see a significant downside to using a small transaction tax or one of the other suggestions. The real hard question is about the benefit or harm of HFT itself. I haven’t heard a decisive argument yet, but I would say that the “liquidity defence” of HFT is in unconvincing to me. I don’t see how liquidity can add value past a certain point.
  - harryh 9y ago
    For the record I do actually see a downside to a trading tax and do not think we should have one. Trading is a useful activity. There is no need to single it out separately from all other forms of economic activity for a special tax.
    - netcan 9y ago
      Trading is probably essential, it definitely is given our economic system which involves trading. In my opinion, HFT does easily merit singling out for evaluation. It is a relatively marginal economic activity, but accounts for a large portion of transactions, mostly in highly liquid markets purposely designed/evolved to be highly efficient like stock markets and other tradable securities markets. I don't think pure theory economics can say much about what happens at extremes like that. Transactions are prices and information. If most transactions are based on HFT strategies divorced from anything even remotely related to an understanding of the underlying asset, who knows what wheels fall off the theoretical model and/or reality. It's worth looking at, at least. As I said though, I agree with you that there's an onus on those proposing a HFT tax to convict it convincingly. I don't think this has happened yet. The argument can't be "weird and scary." I don't see the liquidity defense. How can liquidity beyond a certain point be meaningfully more useful, but that's not a conviction. In my mind, it rests on how HFT impacts economic fragility, and increases the likelihood or impact of busts. We're talking about something like a 0.02% of equity tax on HFT specifically or lower if it's going to be everyone. That does not impede the ability to price in real information. An artificial restriction on trading is not unlike natural ones. Did we have liquidity issues when trading in and out multiple times within tenths of seconds was impossible? I don't think the cost is high. The risk is ..unproven.
- CuriouslyC 9y ago
  High frequency trading is basically capitalizing on inefficiencies in the market. Ideally, those inefficiencies would be addressed directly, and the benefit of a lower friction marketplace would be distributed among all participants. Then all the energy going into HFT could be redirected to something more productive.
  - dsacco 9y ago
    Yes, and this is happening. The low hanging fruit in HFT is effectively gone, and you can no longer compete on just speed. The industry has been shrinking since the early 2010s.
- woopwoop 9y ago
  http://www.thebigquestions.com/2014/04/21/high-frequency-rentseeking/ http://www.thebigquestions.com/2014/04/21/high-frequency-ren... This seems pretty convincing to me. The argument is that, based on the amount that firms are willing to spend on fiberoptic cables to perform hft, they put an extremely high value on hft. On the other hand, reasonable back-of-the-envelope calculations show that the social benefit of making the trade slightly faster are much less than the private cost. This indicates that almost all of the private benefit from hft comes from value accruing to the hft firm at the expense of other hft firms. We therefore expect to see overinvestment in hft. What about this do you find objectionable?
  - harryh 9y ago
    HFT has drastically reduced the costs of trading and improved the returns of nearly all investors especially retail investors like you and me. These benefits are huge. This blog post ignores them. Here is Vanguard's CEO on the topic: http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-frequency-trading-firms.html http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f... That blog post also makes a mistake of claiming that the advantage of these sorts of fiber optic cables is to let people complete their trades faster. That is not the case. They enable people to execute their trades at better prices. The way he is looking at this issue is almost silly.
  - pdeuchler 9y ago
    The entire argument is extrapolation based on the cost for a firm to lay optic cable, are you serious? Do we really measure the social good of Google by how much capital they put into their fancy server clock syncing (the exact name of the project escapes me)? How did we get to a point where "reasonable back of the envelope calculations" are what people seriously consider when trying to develop economic policy for the biggest economy in the world?
dsacco 9y ago
> Something like a minimum holding time is a more reasonable approach. However, there's not a clear cut answer in any case. Why do you want to reduce high frequency trading?
- ghostbrainalpha 9y ago
  http://www.investopedia.com/articles/markets/012716/four-big-risks-algorithmic-highfrequency-trading.asp http://www.investopedia.com/articles/markets/012716/four-big... This article has a lot of the reasons. I think loss of confidence in Market Integrity is the most important one.
  - dsacco 9y ago
    That article has two reasons, though it spreads "amplification" out among several factors. In fairness, I do agree with the problem of flash crashes, whether they are caused by algorithms moving too quickly or too similarly. I'll contest the "confidence in the market" hypothesis, however. As more investors move to index funds, I don't believe "confidence" as defined would have any significant impact by increasing or decreasing, because fewer participants overall will be actively engaged.
    - ghostbrainalpha 9y ago
      That's a good point about index funding. I do think if confidence in the market gets low enough it is possible that people will stop investing all together or invest less than they would have. But that is me sidestepping the issue a bit.
- kesselvon 9y ago
  flash market crashes.
  - dsacco 9y ago
    Okay, fair enough. But do you believe these happen often enough, or will increase in the future, to outweigh the improvements to liquidity provided by HFT?
deleted 9y ago
[deleted]

Something like a minimum holding time is a more reasonable approach. However, there's not a clear cut answer in any case.

by dm3 9y ago

Something like a minimum holding time is a more reasonable approach. However, there's not a clear cut answer in any case.

harryh 9y ago

Before you start talking about what would be effective in reducing the amount of high frequency trading you have to make the case that reducing HFT is a good goal in the first place. This is a challenging case to make.

Jweb_Guru 9y ago
Why is it challenging? What conceivable valuable function does front-running serve?
- dsacco 9y ago
  High frequency trading is not front running. It's becoming truly kafkaesque how often this claim comes up on Hacker News.
  - theseatoms 9y ago
    Or kafkaesque how often these separate concepts are conflated in popular usage.
- harryh 9y ago
  First you have to tell me what you think front running means. Originally front running had a very specific definition: Someone who has a fiduciary responsibility to me cannot use my trading interests to execute their own trades before they execute my trades. This sort of thing is clearly wrong because it can result in someone I've hired delivering subpar execution prices to me. However the term has expanded a lot over the years to mean a lot of different things to a lot of different people. So what does it mean to you?
- gnaritas 9y ago
  You don't know what front-running means, and HFT's aren't doing it.
netcan 9y ago
These need to be discussed together. Otherwise, the defence of HFT tends to cite the economic damage caused by measures to reduce it. Anyway, I agree with you. I don’t see a significant downside to using a small transaction tax or one of the other suggestions. The real hard question is about the benefit or harm of HFT itself. I haven’t heard a decisive argument yet, but I would say that the “liquidity defence” of HFT is in unconvincing to me. I don’t see how liquidity can add value past a certain point.
- harryh 9y ago
  For the record I do actually see a downside to a trading tax and do not think we should have one. Trading is a useful activity. There is no need to single it out separately from all other forms of economic activity for a special tax.
  - netcan 9y ago
    Trading is probably essential, it definitely is given our economic system which involves trading. In my opinion, HFT does easily merit singling out for evaluation. It is a relatively marginal economic activity, but accounts for a large portion of transactions, mostly in highly liquid markets purposely designed/evolved to be highly efficient like stock markets and other tradable securities markets. I don't think pure theory economics can say much about what happens at extremes like that. Transactions are prices and information. If most transactions are based on HFT strategies divorced from anything even remotely related to an understanding of the underlying asset, who knows what wheels fall off the theoretical model and/or reality. It's worth looking at, at least. As I said though, I agree with you that there's an onus on those proposing a HFT tax to convict it convincingly. I don't think this has happened yet. The argument can't be "weird and scary." I don't see the liquidity defense. How can liquidity beyond a certain point be meaningfully more useful, but that's not a conviction. In my mind, it rests on how HFT impacts economic fragility, and increases the likelihood or impact of busts. We're talking about something like a 0.02% of equity tax on HFT specifically or lower if it's going to be everyone. That does not impede the ability to price in real information. An artificial restriction on trading is not unlike natural ones. Did we have liquidity issues when trading in and out multiple times within tenths of seconds was impossible? I don't think the cost is high. The risk is ..unproven.
CuriouslyC 9y ago
High frequency trading is basically capitalizing on inefficiencies in the market. Ideally, those inefficiencies would be addressed directly, and the benefit of a lower friction marketplace would be distributed among all participants. Then all the energy going into HFT could be redirected to something more productive.
- dsacco 9y ago
  Yes, and this is happening. The low hanging fruit in HFT is effectively gone, and you can no longer compete on just speed. The industry has been shrinking since the early 2010s.
woopwoop 9y ago
http://www.thebigquestions.com/2014/04/21/high-frequency-rentseeking/ http://www.thebigquestions.com/2014/04/21/high-frequency-ren... This seems pretty convincing to me. The argument is that, based on the amount that firms are willing to spend on fiberoptic cables to perform hft, they put an extremely high value on hft. On the other hand, reasonable back-of-the-envelope calculations show that the social benefit of making the trade slightly faster are much less than the private cost. This indicates that almost all of the private benefit from hft comes from value accruing to the hft firm at the expense of other hft firms. We therefore expect to see overinvestment in hft. What about this do you find objectionable?
- harryh 9y ago
  HFT has drastically reduced the costs of trading and improved the returns of nearly all investors especially retail investors like you and me. These benefits are huge. This blog post ignores them. Here is Vanguard's CEO on the topic: http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-frequency-trading-firms.html http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f... That blog post also makes a mistake of claiming that the advantage of these sorts of fiber optic cables is to let people complete their trades faster. That is not the case. They enable people to execute their trades at better prices. The way he is looking at this issue is almost silly.
- pdeuchler 9y ago
  The entire argument is extrapolation based on the cost for a firm to lay optic cable, are you serious? Do we really measure the social good of Google by how much capital they put into their fancy server clock syncing (the exact name of the project escapes me)? How did we get to a point where "reasonable back of the envelope calculations" are what people seriously consider when trying to develop economic policy for the biggest economy in the world?

dsacco 9y ago

> Something like a minimum holding time is a more reasonable approach. However, there's not a clear cut answer in any case. Why do you want to reduce high frequency trading?

ghostbrainalpha 9y ago
http://www.investopedia.com/articles/markets/012716/four-big-risks-algorithmic-highfrequency-trading.asp http://www.investopedia.com/articles/markets/012716/four-big... This article has a lot of the reasons. I think loss of confidence in Market Integrity is the most important one.
- dsacco 9y ago
  That article has two reasons, though it spreads "amplification" out among several factors. In fairness, I do agree with the problem of flash crashes, whether they are caused by algorithms moving too quickly or too similarly. I'll contest the "confidence in the market" hypothesis, however. As more investors move to index funds, I don't believe "confidence" as defined would have any significant impact by increasing or decreasing, because fewer participants overall will be actively engaged.
  - ghostbrainalpha 9y ago
    That's a good point about index funding. I do think if confidence in the market gets low enough it is possible that people will stop investing all together or invest less than they would have. But that is me sidestepping the issue a bit.
kesselvon 9y ago
flash market crashes.
- dsacco 9y ago
  Okay, fair enough. But do you believe these happen often enough, or will increase in the future, to outweigh the improvements to liquidity provided by HFT?

deleted 9y ago

[deleted]