3 ms·

I think the point is that they actually don't solve any practical problems in liquidity or price discovery. Does anyone on earth care about the price of lumber

by jbooth 16y ago

I think the point is that they actually don't solve any practical problems in liquidity or price discovery. Does anyone on earth care about the price of lumber within even a 24 hour window? Why should we care about a sub second window? We don't. Wall Street refers to the high frequency game as "taking the dumb money". I call it "ripping off the value investors who actually serve a role in the economy". Finance serves an important function in the economy, routing money to where it's needed. Are they doing a better job of that now than they were in 1985? Not really. So why are they extracting 10X the money in bonuses and profits?

Symmetry 16y ago
I'm not sure about subsecond windows, but 24 hour windows certainly matter. Say you're planning on making a big order of lumber for your mill and you're ordering from a market with zero speculation so the prices jump up and down with the supplier's inventory. It makes a lot of sense then to wait a few days (during which your machines and workers are idle) to get the best price possible. I'm not going to say that high frequency trading serves a useful purpose, but to me that looks like a zero-sum struggle between Wall Street firms for profits that Wall Street deserves for doing its thing on a minute to minute or hour to hour level.
- jbooth 16y ago
  Ok, fine, downgrade 24 hours to 1 hour. Nobody cares about those prices within 1 hour. We've had markets that operate within 1 hour for over a century. What did all the "innovation" actually produce? I know Wall St is making more money but are they providing more value?
  - yummyfajitas 16y ago
    High speed trading is only relevant to the competition between market makers and other short term speculators. It has no effect on long term speculators/hedgers/etc. If you want to trade right now, you will pay a few cents/share for the privilege (this is the spread). If my company was fastest, we sit at the top of the order queue, and we will receive those few cents/share. If GS was faster, they get the pennies. Either way, you trade right now. And if I decide to cut in line by offering a better price, you trade right now for less.
yummyfajitas 16y ago
Wall Street refers to the high frequency game as "taking the dumb money". This is a rather strange thing for them to say, since it's usually the smart money types complaining about HFT. It used to be that mutual/pension funds and other institutional investors could hide their big trades in noise - the market would adjust slowly, and other people (retail investors, smaller shops, assorted other suckers) would absorb the price impact of the trades. Now they are complaining they can't do this anymore. http://www.advancedtrading.com/exchanges/showArticle.jhtml?articleID=219401479 http://www.advancedtrading.com/exchanges/showArticle.jhtml?a... (The authors of this article work for a "rent our 'screw the retail guys' algorithm" outfit.) Basically, assorted HFT shops catch them in the act, trade ahead of them, and split the profits with the former "suckers" [1]. [1] Crossing the spread means that the passive investors in the market are making a premium. [1] See also this article: http://www.zerohedge.com/article/pipeline-executives-confirm-abusive-hft-practices-including-potential-front-running http://www.zerohedge.com/article/pipeline-executives-confirm...
- jbooth 16y ago
  Well, you know a lot more about HFT than I do, I just know that I've heard several people refer to their trading practices as taking the dumb money, including a one-guy algo shop that sounded similar to how you've described your work. At the end of the day though, I'm still stuck on my 1985 story -- compensation, profits, bonuses, etc have skyrocketed since then. But what good have all the newfangled instruments done for the rest of the economy? Doesn't seem like much. So is it just rent-seeking? EDIT: RE: hiding the big trades in noise. What's wrong with that? Why should they have to develop a special HFT algorithm in order to simply move shares around without getting their lunch eaten? This is exactly the kind of value extraction I'm talking about. HFT shops have now created a huge expense for these retail shops that didn't exist before.. are the financial markets functioning better as a result? No, they're just sucking more money out as transaction costs.
  - yummyfajitas 16y ago
    Comp/bonuses went up for some. It went to zero for many others. In 1985, banks had armies of line workers processing trades, managed by officers making decent money. The average comp at a bank might be the average of 1 officer and 100-500 low level line workers. It would be better than other office jobs, but not great. In 2010, the officer specs out business requirements after talking to traders and regulators, sends the high level work to IT and the CRUD apps to Bangalore. 475 of the 500 line workers have been replaced by a data center in Nutley, NJ, 5 remain in the US handling cash wires and other time-zone sensitive work, and 20 work via email out of an office park in Pune. For obvious reasons, the average comp of 1 officer + 3 IT guys + 5 US line workers is going to be far higher than the average comp of 500 grunts + 1 officer. Additionally, for many reasons (IT being one of the biggest ones), it's also vastly easier today to strike out on your own than ever before. In 1985, if you wanted to quit and start a hedge fund, it was tough. Today, a hedge fund can be operated by 3-4 guys + servers. Banks are forced to pay their traders enough money to prevent them from quitting and doing exactly this. (Remind you of another high comp industry, with established players giving out big comp packages to retain talent?) Edit (in response to your edit): RE: hiding the big trades in noise. What's wrong with that? Why should they have to develop a special HFT algorithm in order to simply move shares around without getting their lunch eaten? This is exactly the kind of value extraction I'm talking about. HFT shops have now created a huge expense for these retail shops that didn't exist before.. When you make a large trade, there will be a price impact. This is unavoidable - if you are selling millions of shares, supply went up, and price must drop. In 1985, institutional investors (not retail investors) tried to make sure that other people (their counterparties) suffered the price impact. They would sell shares at full price, retail investors (i.e., my Mom) would buy from them, and then shares would go down once the market figured out supply dramatically increased. In 2010, some HFT shops will sell to my Mom at a favorable price, and then buy from the institutional investor after prices go down. This benefits the HFT shop and retail investors at the expense of the institutional investor. I'm not saying this is good or bad, I'm saying it benefits "dumb money" (little guys who can't afford to rent an algorithm) at the expense of "smart money" (Goldman, Vanguard, Calpers Pension Fund). [edit2: just a disclaimer - specific numbers/cities should not be taken as precise. The data center might be in Jersey City or Brooklyn, Pune might be Cebu or even Baltimore, and there might have been 250 or 1000 line workers rather than 500.]

by jbooth 16y ago

Symmetry 16y ago

I'm not sure about subsecond windows, but 24 hour windows certainly matter. Say you're planning on making a big order of lumber for your mill and you're ordering from a market with zero speculation so the prices jump up and down with the supplier's inventory. It makes a lot of sense then to wait a few days (during which your machines and workers are idle) to get the best price possible. I'm not going to say that high frequency trading serves a useful purpose, but to me that looks like a zero-sum struggle between Wall Street firms for profits that Wall Street deserves for doing its thing on a minute to minute or hour to hour level.

jbooth 16y ago
Ok, fine, downgrade 24 hours to 1 hour. Nobody cares about those prices within 1 hour. We've had markets that operate within 1 hour for over a century. What did all the "innovation" actually produce? I know Wall St is making more money but are they providing more value?
- yummyfajitas 16y ago
  High speed trading is only relevant to the competition between market makers and other short term speculators. It has no effect on long term speculators/hedgers/etc. If you want to trade right now, you will pay a few cents/share for the privilege (this is the spread). If my company was fastest, we sit at the top of the order queue, and we will receive those few cents/share. If GS was faster, they get the pennies. Either way, you trade right now. And if I decide to cut in line by offering a better price, you trade right now for less.

yummyfajitas 16y ago

Wall Street refers to the high frequency game as "taking the dumb money". This is a rather strange thing for them to say, since it's usually the smart money types complaining about HFT. It used to be that mutual/pension funds and other institutional investors could hide their big trades in noise - the market would adjust slowly, and other people (retail investors, smaller shops, assorted other suckers) would absorb the price impact of the trades. Now they are complaining they can't do this anymore. http://www.advancedtrading.com/exchanges/showArticle.jhtml?articleID=219401479 http://www.advancedtrading.com/exchanges/showArticle.jhtml?a... (The authors of this article work for a "rent our 'screw the retail guys' algorithm" outfit.) Basically, assorted HFT shops catch them in the act, trade ahead of them, and split the profits with the former "suckers" [1]. [1] Crossing the spread means that the passive investors in the market are making a premium. [1] See also this article: http://www.zerohedge.com/article/pipeline-executives-confirm-abusive-hft-practices-including-potential-front-running http://www.zerohedge.com/article/pipeline-executives-confirm...

jbooth 16y ago
Well, you know a lot more about HFT than I do, I just know that I've heard several people refer to their trading practices as taking the dumb money, including a one-guy algo shop that sounded similar to how you've described your work. At the end of the day though, I'm still stuck on my 1985 story -- compensation, profits, bonuses, etc have skyrocketed since then. But what good have all the newfangled instruments done for the rest of the economy? Doesn't seem like much. So is it just rent-seeking? EDIT: RE: hiding the big trades in noise. What's wrong with that? Why should they have to develop a special HFT algorithm in order to simply move shares around without getting their lunch eaten? This is exactly the kind of value extraction I'm talking about. HFT shops have now created a huge expense for these retail shops that didn't exist before.. are the financial markets functioning better as a result? No, they're just sucking more money out as transaction costs.
- yummyfajitas 16y ago
  Comp/bonuses went up for some. It went to zero for many others. In 1985, banks had armies of line workers processing trades, managed by officers making decent money. The average comp at a bank might be the average of 1 officer and 100-500 low level line workers. It would be better than other office jobs, but not great. In 2010, the officer specs out business requirements after talking to traders and regulators, sends the high level work to IT and the CRUD apps to Bangalore. 475 of the 500 line workers have been replaced by a data center in Nutley, NJ, 5 remain in the US handling cash wires and other time-zone sensitive work, and 20 work via email out of an office park in Pune. For obvious reasons, the average comp of 1 officer + 3 IT guys + 5 US line workers is going to be far higher than the average comp of 500 grunts + 1 officer. Additionally, for many reasons (IT being one of the biggest ones), it's also vastly easier today to strike out on your own than ever before. In 1985, if you wanted to quit and start a hedge fund, it was tough. Today, a hedge fund can be operated by 3-4 guys + servers. Banks are forced to pay their traders enough money to prevent them from quitting and doing exactly this. (Remind you of another high comp industry, with established players giving out big comp packages to retain talent?) Edit (in response to your edit): RE: hiding the big trades in noise. What's wrong with that? Why should they have to develop a special HFT algorithm in order to simply move shares around without getting their lunch eaten? This is exactly the kind of value extraction I'm talking about. HFT shops have now created a huge expense for these retail shops that didn't exist before.. When you make a large trade, there will be a price impact. This is unavoidable - if you are selling millions of shares, supply went up, and price must drop. In 1985, institutional investors (not retail investors) tried to make sure that other people (their counterparties) suffered the price impact. They would sell shares at full price, retail investors (i.e., my Mom) would buy from them, and then shares would go down once the market figured out supply dramatically increased. In 2010, some HFT shops will sell to my Mom at a favorable price, and then buy from the institutional investor after prices go down. This benefits the HFT shop and retail investors at the expense of the institutional investor. I'm not saying this is good or bad, I'm saying it benefits "dumb money" (little guys who can't afford to rent an algorithm) at the expense of "smart money" (Goldman, Vanguard, Calpers Pension Fund). [edit2: just a disclaimer - specific numbers/cities should not be taken as precise. The data center might be in Jersey City or Brooklyn, Pune might be Cebu or even Baltimore, and there might have been 250 or 1000 line workers rather than 500.]