6 ms·

A market for trading perception of value should be regulated to increments of days or weeks, not minutes. The current structure for valuating securities does a

• drx 16y ago
  Minute trading introduces very high levels of liquidity to the market. Your thinking represents a common fallacy: "I cannot immediately see any benefit to X, therefore X is pointless / should be abolished".
  • abstractbill 16y ago
    Is more liquidity always better? (It's an honest question - I have no idea myself).
    • mailanay 16y ago
      Imagine liquidity as tank full of fuel in your car. The possibilities of going with a full tank are endless. More fuel than tank's holding capacity is pretty much useless.
      • anamax 16y ago
        > More fuel than tank's holding capacity is pretty much useless. And what, exactly, is the "tank's holding capacity" for liquidity?
        • gloob 16y ago
          Whatever number happens to mesh with the poster's predetermined position on the matter. If they think that HFT isn't "real work"[0], they'll set the level low. If they're a free-market fetishist, they'll say the tank is indefinitely large. Metaphors are rarely a useful approach to understanding something. [0] An amusing position for a programmer to take, considering we make completely intangible stuff while spending hours a day sitting on our asses, but one that a lot of people on this site seem to hold.
        • artsrc 16y ago
          The volume real market participants want to buy or sell.
          • anamax 16y ago
            > The volume real market participants want to buy or sell. What is the definition of "real market participant"? For example, are day-traders real market participants? If not, why not? How about me? (I rebalance every few months, maybe.) Note that day traders and I have exactly the same goal - make money. How many people trade for other reasons?
            • artsrc 16y ago
              If you can think of a better term than "real participant" please let me know. If your job is to record or settle trades, be a day trader with no overnight position, track share holdings, etc. then you are a part of the machinery of this capital market, but you are not one of the participants who provides, or consumes capital. You are part of the cost structure. The real participants are those who actions reflect beyond the casino itself, and out into the economy beyond. The purpose of share markets is to provide capital. Long term capital for companies to invest, and in return to provide long term profits for those providing that capital. If you are providing or consuming capital, even for one day, you are to some extent a real participant. I think it is fine for people to make money, brokers to charge a fee for a trade, day trading, advising on diversification, etc.. But we should understand that these are costs associated with this system of providing capital/investing. You sound like you provide capital and participate as an investor.
      • yummyfajitas 16y ago
        No, imagine liquidity as a keg of beer. If you drink some, it tastes great. If you drink some more, you feel dizzy, and eventually you wake up with a really ugly girl in your bed. When using analogies, some explanation is helpful.
        • artsrc 16y ago
          If there are 10 people who want move to street x, having 14 sellers all selling identical apartments, at identical prices is no different than having 50 people selling identical apartments at identical prices or 200. The difference with HFC is they don't provide any actual liquidity that matters. They don't hold the apartments across different move in dates.
    • drx 16y ago
      Good question. I would imagine not, especially from the point of view of someone who can exploit an illiquidity.
      • sambe 16y ago
        Good answer. Arguably, in a simplistic sense more liquidity is always better for the functioning of the market. But if we have a lot of "false" liquidity that perhaps encourages people to make optimistic assumptions, and that liquidity can go away... like it did a few weeks ago (or during a crisis...). Maybe some people can profit from this, especially if they have the ability to front-run?
    • silverlake 16y ago
      Liquidity means you can easily find a buyer or seller. In what circumstance would this not be a good thing? You get minimal markups (bid/ask spread), you can get in and out of trades quickly, and you can easily determine the market value of your securities. Housing is totally illiquid: there's a big broker fee, it takes a while to sell your house, and you can only guess at its true value by comparing to recent sales of similar houses. There's some weird cases in global markets where liquidity allegedly causes problems.
      • Retric 16y ago
        Edit: The more trades made independent of stocks fundamentals the lower the signal to noise ratio. Both negative AND positive feedback loops independent of underlying value are bad.
  • _delirium 16y ago
    However it also adds high levels of volatility and self-organizing behavior (i.e. trends that feed on other trends, not on underlying signals). One might add another fallacy: "The market does X, therefore X is good".
    • drx 16y ago
      I didn't say it was good, I said that discarding something merely because you see a drawback and no benefits is foolish. You are right about the feedback loops though.
      • parallax7d 16y ago
        I would posit that discarding something because you see drawbacks and no benefits is logical. Prescribing what someone you've never met knows or doesn't know would be, if not foolish, presumptuous.
  • jbooth 16y ago
    So? Let's say all subsecond trading is abolished tomorrow, and rather than a smooth curve, all asset prices step at 1-second intervals. What value was destroyed there? If none, what value are these guys creating? None?
    • anamax 16y ago
      > Let's say all subsecond trading is abolished tomorrow, and rather than a smooth curve, all asset prices step at 1-second intervals. That will tend to expand the bid-ask spread. That hurts both buyer and seller.
      • chopsueyar 16y ago
        So a decrease in liquidity will cause an increase in volatility?
        • gsmaverick 16y ago
          Possibly, but the biggest difference would be the increase in the bid/ask spread.
          • jbooth 16y ago
            I don't see why high-frequency trading contracts that spread. If they overlap very briefly (say, across different markets) and nobody else has noticed yet, a trading program jumps in and arbs the difference. That increases the spread.
            • yummyfajitas 16y ago
              If they overlap very briefly (say, across different markets) and nobody else has noticed yet, a trading program jumps in and arbs the difference. Utter nonsense. In the case of crossed markets it is illegal to trade. Trading under these circumstances would violate RegNMS and most matching engines will reject orders that would cross the markets. HFT firms reduce the spread due to competition. If the spread is $0.03 (say $9.97 and $10.00), I can do one of two things to be at the top of the order book and be the first to trade. I can either place my order first, or I can place an order at a higher price. If I'm the fastest, I have the earliest order at price $9.97 and I get filled first in the event of a trade. In this case, I make $0.03/share. If I'm not the fastest, I can still get to the top of the book by placing an order at $9.98. This reduces the spread to $0.02, and I can only make $0.02/share.
  • neilk 16y ago
    I'm not an expert, but how does HFT increase liquidity? One definition of liquidity is when you can sell something without affecting the price much. Most people on Wall Street will tell you their job somehow increases liquidity -- connecting buyers and sellers in more and more efficient ways. HFT seems different. It is comparable to front-running other people's orders. Someone tries to buy an item for $1.00, and the HFT algorithm tries to grab the item first and resell it to our original buyer (and other people in the market) for just a tiny bit more. From my perspective it's effectively a sort of tax, like a bridge toll. It seems to me like this has to make every transaction affect the price more, not less. How does this increase efficiency or liquidity?
    • noname123 16y ago
      You right. But I'll give you the counter-argument. In the stock market, just like the real estate/auto market, there are never just true buyers and sellers; there are also brokers and dealers who keep a inventory of goods, so that they can sell to non-discriminating retail customers who just want the goods right now. Their expertise and self-interests in turns, affects the price of the good in the whole entire market. The stock market once have had traditional broker-dealers that controlled the spread of a stock. That is, dealers are willing to buy stocks from impatient traders who are willing to sell at a market order at a price that is set by the dealer; the dealers then in turn, later sell their inventory at an artificially inflated price to impatient traders who are willing buy the stock at a market at the price named by the dealer. Traditional dealers, in order to tack on the risk of carrying their inventory of stocks (after all, a stock could theoretically drop to zero before they could sell the whole lot), keep the spread of the stock big (they are willing to buy low and sell high) at the expense of retail investors. HFT, due to their high-tech platform and high execution speed tightens this spread because they don't carry as high a risk of inventory; because their execution speed is in timescale of micro-seconds; so essentially, in the timeframe of seconds, they buy a position and then sell that position subsequently and not really carry that position through for the market to affect the value of that position. This in theory is good for retail investors as they actually end up paying less for their stocks. But with good technology, you could also use it for bad. With fast computers and sophisticated algorithms, HFT traders could learn how to game the traders and big funds that they are suppose to server - just like a regular car or real estate dealer. If you know where the consumer demand is, you could buy up all of the supply ahead of time and artificially inflate the price to make people pay more. If you know that your competitors are replicating your every move, you could deceive them by making a small trade against your true intention, have them jump on the bandwagon and swiftly punish them by executing your true big trade afterwords. The possibilities are endless.
  • nradov 16y ago
    Everyone understands that high liquidity is beneficial: it lowers the cost of capital thus allowing businesses to expand. But have researchers ever quantified the liquidity premium reduction provided by HFT versus the economic rents extracted by the traders? Depending on the ratio, society might actually be better off with a little less liquidity.
    • thailandstartup 16y ago
      I think that we do overpay for this liquidity. Both in terms of economic rents extracted, and the wasted resources poured into the competition. I wonder if there might be a way to keep most of the liquidity but at a fraction of the cost
  • dman 16y ago
    Except that when the liquidity is most needed it disappears. Example the market fall on May 6th of this year. http://www.minyanville.com/businessmarkets/articles/apple-microsoft-flash-crash-market-capitalization/6/7/2010/id/28621 http://www.minyanville.com/businessmarkets/articles/apple-mi...
  • SkyMarshal 16y ago
    I don't recall us having significant liquidity problems prior to HFT, except during crisis, and as the recent one shows, we had liquidity problems even with HFT then. I'm not buying the argument that 'HFT' provides any meaningful additional liquidity.
  • Maro 16y ago
    You can't possibly argue that doing billions of trades a minute has anything to do with real-life liquidity. By real-life, I mean liquidity that's relevant to a bank's customer, eg. a private citizen who possibly even owns a trading account. And that's the only kind of liquidity I care about. It's just a game to extract money from the economy without doing real work.
    • artsrc 16y ago
      It is real work, it just provides no real net value.
  • artsrc 16y ago
    I can see an obvious cost to X, after many years no-one has produced any evidence of value to X, therefore X should be abolished, if it can be done at reasonable cost. Investors providing capital should not care what time of day their trade goes through because it will settle at the same time anyway. So this 'liquidity' is worthless. The purpose of shares is to raise capital for productive investment, in return for income to long term investors who provide the capital. Both non-computerized traders, and computerized HFC traders have an obvious cost, they extract return from the markets that would otherwise go to investors. This reduces the returns for investors. What if we create an exchange where market participants submit orders which are crossed once a day? You establish a fair matching system and clearing price algorithm. In that environment there is less money going to minute traders and so there would be better returns for investors.