3 ms·

Oh, I wouldn’t even call my idle layman thoughts a theory, more of a hunch really. Have retail investors generally benefitted from doing an amount of trading t

by jrowen 6y ago

Oh, I wouldn’t even call my idle layman thoughts a theory, more of a hunch really. Have retail investors generally benefitted from doing an amount of trading that would incur significant transaction costs? Do you think my general sentiment is off base, and the market (as is) is unequivocally a good thing for society as a whole? Even with regular worldwide crises caused by wild speculation, greed, and incompetence? I would be very interested to read a thorough defense of how the increasingly complex market machinations and instruments are good for “the people” and some indication that their value isn’t entirely captured by the small cohort that dreamed them up. I admit that I understand this very poorly.

tptacek 6y ago
A thing retail investors have always done (placing orders to buy and sell stocks) used to cost a lot. Now it's practically free. You can flee to a more abstract argument about whether investing itself is bad, but I'm not interested in debating that, only in observing that HFT had a large hand in eliminating those costs. I note further that you only attempted to rebut one of the two points I made in my comment.
- jrowen 6y ago
  That’s been my argument/question all along, though. I started off with the sentiment that maybe we should stop people from buying stocks, period. HFT was not the main thrust, I can easily claim that you’ve sidestepped my points as well. Anyway I’m not trying to debate, I thought it was clear from my last post that I’m not an expert and I’m really just asking questions (sincerely, not rhetorically) and seeking to gain more understanding of the market and its macro-level, “big picture” effects on society.
  - tptacek 6y ago
    I'm not interested in and take no position on your broader argument. I'm exclusively interested in: "HFT? How is that anything but absurd?". I think that's easy to refute. If we agree, we agree, that's great.
    - jrowen 6y ago
      So HFT is not absurd because it lowered transaction costs for retail investors. What mechanism did it achieve this by? I call it absurd because computer algorithms trading stocks at the microsecond level seems completely divorced from the theoretical basis of “investing.” I don’t understand how it makes sense on a theoretical level. Reducing transaction costs doesn’t seem to explain that.
      - tptacek 6y ago
        For example: HFT-backed trading systems enable companies like Citadel to quote better spreads to retail traders than to hedge and mutual funds, which is why PFOF arrangements are structured in terms of how much better their prices will be than the actual exchange (which they are required to at least match, by regulation). It's probably the case that no one person needs to make a microsecond-scale trade. But, obviously, there are many people trading, not just one, and making things very fast is one way you make things scale. In reality, though, extremely high performance is probably more important as a vector for competition, which is ultimately what brought spreads down.
        jrowen 6y ago
        Thank you. I definitely have some reading to do in trying to wrap my head around all of this. At first glance, it does seem like some people in the industry (Charlie Munger, Michael Spence) share my perspective (though Munger could just be strategizing).
        tptacek 6y ago
        You know who is almost certainly not strategizing? Vanguard, which is probably the most trustworthy firm in all of finance. You can look up what they've said about HFT, too. :)
        jrowen 6y ago
        I keep coming back to these fundamental questions. HFT (and market making in general) increases liquidity. Why is liquidity a good thing? Why should it be so easy to quickly buy and sell ownership of companies? To me that seems like a bad thing. I feel like I’m just missing some fundamental understanding. As a powerful investor, you can buy a large position in a company, lobby for changes that increase the short term value of the stock, sell it, and move on, likely destroying it in the process, leaving all of the people who were actually invested in its success holding the bag. Is that to be seen as a net good? It seems like HFT and other instruments are just taking that concept to ever more extreme levels.

by jrowen 6y ago

tptacek 6y ago

A thing retail investors have always done (placing orders to buy and sell stocks) used to cost a lot. Now it's practically free. You can flee to a more abstract argument about whether investing itself is bad, but I'm not interested in debating that, only in observing that HFT had a large hand in eliminating those costs. I note further that you only attempted to rebut one of the two points I made in my comment.

jrowen 6y ago
That’s been my argument/question all along, though. I started off with the sentiment that maybe we should stop people from buying stocks, period. HFT was not the main thrust, I can easily claim that you’ve sidestepped my points as well. Anyway I’m not trying to debate, I thought it was clear from my last post that I’m not an expert and I’m really just asking questions (sincerely, not rhetorically) and seeking to gain more understanding of the market and its macro-level, “big picture” effects on society.
- tptacek 6y ago
  I'm not interested in and take no position on your broader argument. I'm exclusively interested in: "HFT? How is that anything but absurd?". I think that's easy to refute. If we agree, we agree, that's great.
  - jrowen 6y ago
    So HFT is not absurd because it lowered transaction costs for retail investors. What mechanism did it achieve this by? I call it absurd because computer algorithms trading stocks at the microsecond level seems completely divorced from the theoretical basis of “investing.” I don’t understand how it makes sense on a theoretical level. Reducing transaction costs doesn’t seem to explain that.
    - tptacek 6y ago
      For example: HFT-backed trading systems enable companies like Citadel to quote better spreads to retail traders than to hedge and mutual funds, which is why PFOF arrangements are structured in terms of how much better their prices will be than the actual exchange (which they are required to at least match, by regulation). It's probably the case that no one person needs to make a microsecond-scale trade. But, obviously, there are many people trading, not just one, and making things very fast is one way you make things scale. In reality, though, extremely high performance is probably more important as a vector for competition, which is ultimately what brought spreads down.
      - jrowen 6y ago
        Thank you. I definitely have some reading to do in trying to wrap my head around all of this. At first glance, it does seem like some people in the industry (Charlie Munger, Michael Spence) share my perspective (though Munger could just be strategizing).
        tptacek 6y ago
        You know who is almost certainly not strategizing? Vanguard, which is probably the most trustworthy firm in all of finance. You can look up what they've said about HFT, too. :)
        jrowen 6y ago
        I keep coming back to these fundamental questions. HFT (and market making in general) increases liquidity. Why is liquidity a good thing? Why should it be so easy to quickly buy and sell ownership of companies? To me that seems like a bad thing. I feel like I’m just missing some fundamental understanding. As a powerful investor, you can buy a large position in a company, lobby for changes that increase the short term value of the stock, sell it, and move on, likely destroying it in the process, leaving all of the people who were actually invested in its success holding the bag. Is that to be seen as a net good? It seems like HFT and other instruments are just taking that concept to ever more extreme levels.