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Should High-Frequency Trading Be Banned?
- MarkPNeyer 16y agoHow about a tax on capital gains that is inversely proportional to the time the financial instrument is held? The biggest cost HFT imposes on the world is the brain drain - there are so many super intelligent people working in the arms race that is electronic trading. Imagine if all of those smart people were doing something productive instead of helping people buy and sell options 1 microsecond faster.
- tom_b 16y agoI believe you are presuming that all those super intelligent people are hacking on high frequency trading algos because of the big $$$ being made for it. I think hacking on those things would be great fun. Others might as well. I do like the idea of putting some kind of brake (or field-leveling force?) on the actual act of high speed trading - without any real economic insight of my own, it seem flaky/shady.
- deleted 16y ago[deleted]
- aurem1 16y agoThe main problem with your argument is that you assume some central authority is able to correctly judge what activities are worthwhile and what activities are not. They tried that in the Soviet Union and failed miserably. "Something productive" is very hard to define and that's why we let the marketplace define it.
- baberuth 16y agoI find the "talented people not fulfilling their potential" argument terrible. That's often cited as one of the costs of HFT, but its really true of a lot of human pursuits. It just so happens that the prevailing sentiment is that finance, and HFT in particular are particularly immmoral, so its a popular notion; I find it as "bad" that hordes of talented engineers work on optimizing ad revenue for Google. Humans will always be underemployed from some perspective ("Oh but she could be doing X"). Penalizing them for not operating in a way that is consistent with your (or anyone's) world view is far more sinister.
- pg 16y agoThe fact that smart people's time is also wasted on other types of work doesn't mean there is no such thing as wasting time. Do you really believe it's meaningless to talk about time being misspent? Would you call it sinister for example to criticize someone for spending their time murdering people at random?
- aurem1 16y agoI think the point here is that there is no effective standard by which we can define "wasting time". Many people would consider a lot of the startups you fund as "wasting time". Indeed any particular activity could appear useless. But we prefer a market-driven system because in aggregate we are worse than the marketplace at identifying such activities.
- joebadmo 16y agoI imagine he would call the murdering part sinister, as opposed to the time spent doing something other than what is optimal. I agree with the GP that the opportunity cost argument is so wholly dependent on the judgment of the debated activity that it doesn't really pertain one way or the other. That said, HFT doesn't strike me as something that adds value to the economy.
- pg 16y agoBaberuth and I are talking about whether it's sinister for A to criticize B's actions, not whether B's actions are sinister.
- baberuth 16y agoCorrect pg, though for the record, I do also avoid murder whenever possible. A criticising B is not a problem. A preventing B from doing something is sinister (life, liberty, pursuit of happiness).
- joebadmo 16y ago"Would you call it sinister for example to criticize someone for spending their time murdering people at random?" I'm saying it depends on what A is criticizing about B. It is not sinister for A to criticize B's action. I'm not sure if it's sinister for A to criticize B's misallocation of time spent. It's a weird thing to think about. I think it's weird to think about because, as was my point earlier, the judgment of whether the time was misspent is wholly dependent on the judgment of the way the time was spent.
- andrewf 16y agoImagine if all of those smart people were doing something productive instead of helping people buy and sell options 1 microsecond faster. From each according to his ability?
- dclaysmith 16y agoOr a $.001 tax per transaction.
- bartwe 16y agoDepends on how you define 'High-Frequency Trading'
- mmavnn 16y agoHow about turned based trading? Once an hour, on the hour, results published at half past...
- pasbesoin 16y agoSomething I've favored considering. Put the exchange on a stepped clock. Randomize order processing within each step. I don't care if a lot of people lose their financial jobs. Through their own actions as much as resulting events, they've demonstrated themselves to be harmful parasites. Modern society depends upon a degree of stability and predictability. Current market evolution has been heading in the opposite direction. Time to reign it in to its role as tool, not goal.
- grandalf 16y agoAbsolutely, and all traders should be required to use rotary dial phones to even the playing field further. While we're at it, speaking into the phone at faster than 200 words per minute should also be banned.
- dasil003 16y agoThis is some kind of reverse slippery slope argument that just doesn't hold up to common sense.
- grandalf 16y agoCare to explain or should I just take your word for it?
- deleted 16y ago[deleted]
- nooneelse 16y agoIf a group was proposing that residential areas have a speed limit, and you came back with "ah, and only horse-drawn-buggies should be allowed", that would seem rather irrelevant remark, yes? It would be rather beside the point and couldn't really defeat the proposal due to not actually talking about it. Said another way, the first comment appears to be an attempt at a reductio ad absurdum on banning HFT, however, it does not establish that the absurd conclusion is a clear, logical extension of the position advanced by the other side. Said more in line with how I interpret the previous criticism, you wanted it to be obvious that the other side is on a slippery slope. However no such slope exists; common sense allows for at least one clear stopping point between the actual proposal and your "we've slipped down into absurdity" zone.
- grandalf 16y agoSuppose someone claimed that residential broadband speeds should be capped at 14.4 kilobits per second b/c some teenagers download songs songs with inappropriate lyrics. The reader is supposed to believe that lowering the speed is a good thing just because the reader is assumed to believe that inappropriate lyrics are a bad thing. Prices are not "good" or "bad". Most of the people who oppose HFT are very much in the habit of attributing aesthetic descriptions to prices and to trading patterns. In my opinion, this is a naive view of markets and complex systems that leads to the false expectation of stability, etc.
- cynicalkane 16y agoA while ago someone made the interesting point that the costs of HFT are not being accounted for, from a free-market perspective. Exchanges typically charge for completed trades, not for orders, so traders can flood exchanges with very large amounts of orders. In practice, traders that flood exchanges will face penalties--but that only slows the arms race. The natural economic question is: if HFT traders are making more orders than is efficient, who loses? The answer almost certainly has to be the exchange, and those traders who are losing the time race to HFT's order-spamming advantage. But when Joe the Consumer places an order on the exchange, he always get the best price--it's hard to imagine a way Joe, or even Joe's Mutual Fund, can anything but benefit from HFT.
- grandalf 16y agoExactly. HFT disempowers market makers b/c all those orders create extra liquidity with worse spread for market makers. The anti-HFT sentiment is similar to the opposition to electronic exchanges and demands that all pricing be centrally routed -- the old school exchanges realize they have a sweet deal and so they try to fight off other sources of trades/liquidity/pricing.
- HockeyPlayer 16y agoYou are confused. Most HFT shops are market makers.
- grandalf 16y agoTechnically you're correct, but I was referring to the traditional market making firms who buy seats on exchanges to do business in a handful of stocks.
- HockeyPlayer 16y agook, I understand your point. I think we agree that the HFT firms tightening spreads is good for consumers.
- 16y ago
- dalore 16y agoWhy can the banks have high-frequency trading, yet still not have instant transfers between accounts?
- secretasiandan 16y agoOne creates directly attributable profits with little, if any, ongoing exposure. The other creates little, if any directly attributable profits. Furthermore, if the transfer is from one bank to another, the sender wants to hold onto the funds for as long as possible to earn more interest. Lastly, most retail banks probably still run ancient code that is not as conducive to innovation.
- CJefferson 16y agoMy main annoyance with HFT is that it clearly is a "game". A few times algorithms have misbehaved badly, whole blocks of trades have been rolled back.
- baltcode 16y agoWell, if the algos can make money they should also be allowed to lose money. How else would you have efficiency?
- baltcode 16y agoI don't get it. If the flash crash brought down the market drastically for 20 minutes, only to pull it back up, this only points to an opportunity for a more intelligent algorithm to be allowed to correct that and make money in the process. I can understand this as being an example of the state of the art being pretty dumb/gullible to multiplying its own noise, but I don't understand why this would be bad. Didn't the algos selling during the low and buying stocks later lose money?
- yummyfajitas 16y agoDidn't the algos selling during the low and buying stocks later lose money? Not necessarily, many trades were broken (mostly trades near the low). If you sold low and bought halfway to the high, you probably made money since your sale was broken (but not the buy).
- baltcode 16y agoSo the problem was that the trades were broken, not HFT per se.
- Consultuing 16y agoLet me begin by saying that I likely do not understand even half of what HFT is. For me, they key part that I fail to understand is exactly what value HFT adds to non speculative market participants. The only explanation I've heard so far is that HFT adds "liquidity" to the market, but I don't get how. Let V be the value HFT adds to non speculative players. If V is above zero, then allow HFT to continue. If V is zero or negative, my proposal would be not to ban HFT, but to restrict it to transactions made between HFT players. Then let them play in their casino all they want until one player is left. If this suggestion cannot be implemented because HFT needs the rest of the market to make profits, then I highly suspect that V is less or below zero and that HFT is really one of the Casino owners.