8 ms·

Algo trading rapidly replacing humans, warns government paper

34 points by Netadmin 15y ago

rsanchez1 15y ago
They should just go the extra step and completely replace these people with computers. It's not like they're doing anything with their lives anyway.
jvdh 15y ago
At some point we have to wonder what it is that this trading actually is for. Investing in companies, fine. The risk that you take with your invested money evolves over time, true. But at some point it just becomes ridiculous that people are making money from 0.0001 fluctuations in prices.
- esrauch 15y ago
  Why would it be ridiculous to make money from a ton of trades on $0.0001 fluctuations in prices but not fewer trades in $1 fluctuations? It seems to me that your argument applies equally to human day traders and machine trading, neither of them are really related to investing in companies except in terms of setting the price and the oft-cited liquidity that they provide.
  - SHOwnsYou 15y ago
    Flash crashes and short term volatility. Also "oft-cited liquidity that they provide" >> This argument is farcical to the nth degree. When the average time for HFTs to hold onto a new position is less than 30 seconds, I'd say they're merely claiming credit for liquidity that was already there.
    - andylei 15y ago
      http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1100635 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1100635 "Algorithmic trading has sharply increased over the past decade. Does it improve market quality, and should it be encouraged? We provide the first analysis of this question. The NYSE automated quote dissemination in 2003, and we use this change in market structure that increases algorithmic trading as an exogenous instrument to measure the causal effect of algorithmic trading on liquidity. For large stocks in particular, algorithmic trading narrows spreads, reduces adverse selection, and reduces trade-related price discovery. The findings indicate that algorithmic trading improves liquidity and enhances the informativeness of quotes. "
      - hackinthebochs 15y ago
        Can you explain how this "improved" liquidity benefits actual people? It seems to be an assumption that any increase in liquidity is always beneficial. I've never seen an actual explanation arguing how. To put it another way, how do we know the function of liquidity to net human benefit is monotonic (always increasing) rather than having a local maximum?
        andylei 15y ago
        > For large stocks in particular, algorithmic trading narrows spreads lower spreads means you pay less when you trade, simple.
        wisty 15y ago
        Basically, algorithmic traders are disrupting what traditional traders used to do. In the future, Wall Street will be replaced with a couple of big server farms, and a Demand-Media style bidding system for commoditized stock analysts. Imagine it - "Earn cash in your spare time - estimate the future profits of Fortune 500 companies, and plug them into a structured database! Senior members represent us on boards of directors, telling CEOs what the computer thinks they are really worth! (payments contingent on the long-term value of your work)."
        hackinthebochs 15y ago
        Forgive my ignorance, but how so? How does the wealth extracted from the transaction play into this (arbitrage extracts value from a transaction, ideally it's made up for through liquidity).
      - SHOwnsYou 15y ago
        What is improving liquidity? It greatly depends on how you look at it. Do more purchases provide more liquidity? Absolutely. If I previously had 10 buyers and now I have 100, I am absolutely more able to liquify. However, to suggest that the entire 100 are needed to liquify when 10 will do (less than 30 seconds later I might add) is farcical.
    - fleitz 15y ago
      Flash crashes and short term volatility don't affect investors, they primarily affect other traders. The issue is not whether a 30 second hold on a stock is better / worse than a 3 year hold but whether stock markets still serve their purpose of providing capital for companies. The vast majority of trades are for stock that does not capitalize the company.
      - paperwork 15y ago
        The stock market has never provided capital for companies. Companies generally sell their stock to investment banks (stock offerings, initial or subsequent). Those initial share owners turn around and sell in the secondary market -- what we call the stock market. When I buy shares of MSFT, they don't get my money.
    - paperwork 15y ago
      >When the average time for HFTs to hold onto a new position is less than 30 seconds, I'd say they're merely claiming credit for liquidity that was already there This is factually incorrect. A lot of ultra-high frequency trading refers to a practice where traders post a bid or an offer--their orders sit in the 'book,' waiting for other to come and trade with them. The traders who have bids and offers sitting out in the market are even referred to as liquidity providers (as opposed to liquidity takers). There are whole exchanges out there which offer rebates to such traders for providing this liquidity (which means you actually get paid by an exchange to post liquidity). These guys are not in the business of holding positions, they are in the business of providing trade-able liquidity. A car dealer may buy your car, then turn around and sell it the same day--that doesn't not mean they are harming the car market.
      - SHOwnsYou 15y ago
        If liquidity exists without HFT then it's not correct for HFTers to justify their existence by claiming they are liquidity providers. I realize the semantics of this can be argued ("existing liquidity doesn't preclude or prevent the existence HFT" for example), but not only do I think that is a wash argument but it also misses the point entirely on the utility of HFT.
        paperwork 15y ago
        To paraphrase professor Krishnamurthi [http://www.cs.brown.edu/~sk/ http://www.cs.brown.edu/~sk/] "Just semantics. That’s all there is!" HFTers don't have to justify their existence at all. They exist because they are able to profit and their existence is not against the law. As far ethics and morality, I guess that is what we are arguing here :) Liquidity is not pregnancy, there can be a little of it.
Rinum 15y ago
If most trading is based on algorithms, wouldn't the market become predictable?
- nkassis 15y ago
  Not exactly, it might be deterministic but that doesn't mean you can predict what will happen without running it. Same as understanding the forces of a hurricane doesn't let us make very good prediction on it's path without using huge amount of computer power to run the simulation. http://en.wikipedia.org/wiki/Chaos_theory http://en.wikipedia.org/wiki/Chaos_theory
- jsmcgd 15y ago
  The culmination of the high quantity and frequency of the trades makes the relatively simple individual operations chaotic when considered in aggregate. Much like the weather.
- nandemo 15y ago
  Even if the automatic trading becomes a majority of the traded volume, the impact of human trading might still be higher. That is, it could be that most of automatic trading doesn't move the price much in average, while human trades make the price jump more (in reaction to news, mergers, etc). Human trading can only be eliminated if someone develops strong AI. Besides, a lot of what is called algorithmic trading is driven by human, "manual" decisions: say a fund manager wants to buy $10 million worth of stocks someone composing the S&P 500 today, without raising the price of ACME too much, so they use a piece of software that does that automatically.
aristidb 15y ago
Warns? I think that's awesome, but maybe I just love robots too much. That, or people just fear things they don't understand, and robot traders are even harder to understand than human traders, I guess.
kevinpet 15y ago
Parasitic HFT that doesn't actually provide liquidity is a consequence of rules that are designed to provide liquidity. Think of what you would "expect" if things were working right. Am I going to try to sell something at the exact moment a human needs to buy? No, I'm going to sell to a dealer who will hold it for a bit and then sell to a human who wants to buy. The dealer is purely algorithmic, so he may as well be replaced by a computer. From the article "On the positive side of electronic trading, the panel said, liquidity has improved, transaction costs are lower, and market efficiency is generally better." Relevant Monty Python: http://www.youtube.com/watch?v=ExWfh6sGyso http://www.youtube.com/watch?v=ExWfh6sGyso
pasbesoin 15y ago
In my opinion, trading needs to be put on a stepped clock and draw from a randomized queue. A position should be a position and not a matter of beating the other guy to a momentary, transitory state.
- paperwork 15y ago
  >A position should be a position and not a matter of beating the other guy to a momentary, transitory state You are arguing to shut down the whole stock market then. Even value investors like Buffet are in the business of beating the other guy to understanding that given stock is over or under valued. As for transitory state, the point of the stock market is to reflect what is thought to be the 'true' value of a company at any given time.
  - wisty 15y ago
    If you added a little random noise to order timestamps, traders would have less incentive optimize for speed and would direct their efforts elsewhere.
    - pasbesoin 15y ago
      An interesting idea for a less invasive / technically transformative change. (And a new meaning for the term "jittery market". ;-)
  - pasbesoin 15y ago
    No, I'm arguing for a clock cycle that presents an inherent limit on transitory gaming and also allows smaller participants to compete on an equal footing (at least, with regard to order processing). Once a minute, or something else. That's something the big brains can sort out -- earn those salaries in a productive endeavor, for a change. Nickle and diming retirement investments does not, in my perspective, contribute qualitatively to society. (A bit baldly, and narrowly, stated, but a significant part of my point.) Of course, in an increasingly global marketplace of trading, this probably does not have legs. I see the market as connecting investors with investments. Spending heavily to leverage momentary arbitrage does not, in my perspective, add significantly to the base function of the market. Such a stepped clock might also allow/aid some monitoring and capping of flash changes -- the continuing dread of many, that an unbalanced algorithm or combination will take the market down.
seanc 15y ago
It might sound like I'm quibbling, but while it is clear there are more algorithmic trades, the article does not provide any evidence that there are fewer human trades.
known 15y ago
"If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it." --Reagan

34 points by Netadmin 15y ago

They should just go the extra step and completely replace these people with computers. It's not like they're doing anything with their lives anyway.

jvdh 15y ago

At some point we have to wonder what it is that this trading actually is for. Investing in companies, fine. The risk that you take with your invested money evolves over time, true. But at some point it just becomes ridiculous that people are making money from 0.0001 fluctuations in prices.

esrauch 15y ago
Why would it be ridiculous to make money from a ton of trades on $0.0001 fluctuations in prices but not fewer trades in $1 fluctuations? It seems to me that your argument applies equally to human day traders and machine trading, neither of them are really related to investing in companies except in terms of setting the price and the oft-cited liquidity that they provide.
- SHOwnsYou 15y ago
  Flash crashes and short term volatility. Also "oft-cited liquidity that they provide" >> This argument is farcical to the nth degree. When the average time for HFTs to hold onto a new position is less than 30 seconds, I'd say they're merely claiming credit for liquidity that was already there.
  - andylei 15y ago
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1100635 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1100635 "Algorithmic trading has sharply increased over the past decade. Does it improve market quality, and should it be encouraged? We provide the first analysis of this question. The NYSE automated quote dissemination in 2003, and we use this change in market structure that increases algorithmic trading as an exogenous instrument to measure the causal effect of algorithmic trading on liquidity. For large stocks in particular, algorithmic trading narrows spreads, reduces adverse selection, and reduces trade-related price discovery. The findings indicate that algorithmic trading improves liquidity and enhances the informativeness of quotes. "
    - hackinthebochs 15y ago
      Can you explain how this "improved" liquidity benefits actual people? It seems to be an assumption that any increase in liquidity is always beneficial. I've never seen an actual explanation arguing how. To put it another way, how do we know the function of liquidity to net human benefit is monotonic (always increasing) rather than having a local maximum?
      - andylei 15y ago
        > For large stocks in particular, algorithmic trading narrows spreads lower spreads means you pay less when you trade, simple.
        wisty 15y ago
        Basically, algorithmic traders are disrupting what traditional traders used to do. In the future, Wall Street will be replaced with a couple of big server farms, and a Demand-Media style bidding system for commoditized stock analysts. Imagine it - "Earn cash in your spare time - estimate the future profits of Fortune 500 companies, and plug them into a structured database! Senior members represent us on boards of directors, telling CEOs what the computer thinks they are really worth! (payments contingent on the long-term value of your work)."
        hackinthebochs 15y ago
        Forgive my ignorance, but how so? How does the wealth extracted from the transaction play into this (arbitrage extracts value from a transaction, ideally it's made up for through liquidity).
    - SHOwnsYou 15y ago
      What is improving liquidity? It greatly depends on how you look at it. Do more purchases provide more liquidity? Absolutely. If I previously had 10 buyers and now I have 100, I am absolutely more able to liquify. However, to suggest that the entire 100 are needed to liquify when 10 will do (less than 30 seconds later I might add) is farcical.
  - fleitz 15y ago
    Flash crashes and short term volatility don't affect investors, they primarily affect other traders. The issue is not whether a 30 second hold on a stock is better / worse than a 3 year hold but whether stock markets still serve their purpose of providing capital for companies. The vast majority of trades are for stock that does not capitalize the company.
    - paperwork 15y ago
      The stock market has never provided capital for companies. Companies generally sell their stock to investment banks (stock offerings, initial or subsequent). Those initial share owners turn around and sell in the secondary market -- what we call the stock market. When I buy shares of MSFT, they don't get my money.
  - paperwork 15y ago
    >When the average time for HFTs to hold onto a new position is less than 30 seconds, I'd say they're merely claiming credit for liquidity that was already there This is factually incorrect. A lot of ultra-high frequency trading refers to a practice where traders post a bid or an offer--their orders sit in the 'book,' waiting for other to come and trade with them. The traders who have bids and offers sitting out in the market are even referred to as liquidity providers (as opposed to liquidity takers). There are whole exchanges out there which offer rebates to such traders for providing this liquidity (which means you actually get paid by an exchange to post liquidity). These guys are not in the business of holding positions, they are in the business of providing trade-able liquidity. A car dealer may buy your car, then turn around and sell it the same day--that doesn't not mean they are harming the car market.
    - SHOwnsYou 15y ago
      If liquidity exists without HFT then it's not correct for HFTers to justify their existence by claiming they are liquidity providers. I realize the semantics of this can be argued ("existing liquidity doesn't preclude or prevent the existence HFT" for example), but not only do I think that is a wash argument but it also misses the point entirely on the utility of HFT.
      - paperwork 15y ago
        To paraphrase professor Krishnamurthi [http://www.cs.brown.edu/~sk/ http://www.cs.brown.edu/~sk/] "Just semantics. That’s all there is!" HFTers don't have to justify their existence at all. They exist because they are able to profit and their existence is not against the law. As far ethics and morality, I guess that is what we are arguing here :) Liquidity is not pregnancy, there can be a little of it.

Rinum 15y ago

If most trading is based on algorithms, wouldn't the market become predictable?

nkassis 15y ago
Not exactly, it might be deterministic but that doesn't mean you can predict what will happen without running it. Same as understanding the forces of a hurricane doesn't let us make very good prediction on it's path without using huge amount of computer power to run the simulation. http://en.wikipedia.org/wiki/Chaos_theory http://en.wikipedia.org/wiki/Chaos_theory
jsmcgd 15y ago
The culmination of the high quantity and frequency of the trades makes the relatively simple individual operations chaotic when considered in aggregate. Much like the weather.
nandemo 15y ago
Even if the automatic trading becomes a majority of the traded volume, the impact of human trading might still be higher. That is, it could be that most of automatic trading doesn't move the price much in average, while human trades make the price jump more (in reaction to news, mergers, etc). Human trading can only be eliminated if someone develops strong AI. Besides, a lot of what is called algorithmic trading is driven by human, "manual" decisions: say a fund manager wants to buy $10 million worth of stocks someone composing the S&P 500 today, without raising the price of ACME too much, so they use a piece of software that does that automatically.

aristidb 15y ago

Warns? I think that's awesome, but maybe I just love robots too much. That, or people just fear things they don't understand, and robot traders are even harder to understand than human traders, I guess.

kevinpet 15y ago

Parasitic HFT that doesn't actually provide liquidity is a consequence of rules that are designed to provide liquidity. Think of what you would "expect" if things were working right. Am I going to try to sell something at the exact moment a human needs to buy? No, I'm going to sell to a dealer who will hold it for a bit and then sell to a human who wants to buy. The dealer is purely algorithmic, so he may as well be replaced by a computer. From the article "On the positive side of electronic trading, the panel said, liquidity has improved, transaction costs are lower, and market efficiency is generally better." Relevant Monty Python: http://www.youtube.com/watch?v=ExWfh6sGyso http://www.youtube.com/watch?v=ExWfh6sGyso

pasbesoin 15y ago

In my opinion, trading needs to be put on a stepped clock and draw from a randomized queue. A position should be a position and not a matter of beating the other guy to a momentary, transitory state.

paperwork 15y ago
>A position should be a position and not a matter of beating the other guy to a momentary, transitory state You are arguing to shut down the whole stock market then. Even value investors like Buffet are in the business of beating the other guy to understanding that given stock is over or under valued. As for transitory state, the point of the stock market is to reflect what is thought to be the 'true' value of a company at any given time.
- wisty 15y ago
  If you added a little random noise to order timestamps, traders would have less incentive optimize for speed and would direct their efforts elsewhere.
  - pasbesoin 15y ago
    An interesting idea for a less invasive / technically transformative change. (And a new meaning for the term "jittery market". ;-)
- pasbesoin 15y ago
  No, I'm arguing for a clock cycle that presents an inherent limit on transitory gaming and also allows smaller participants to compete on an equal footing (at least, with regard to order processing). Once a minute, or something else. That's something the big brains can sort out -- earn those salaries in a productive endeavor, for a change. Nickle and diming retirement investments does not, in my perspective, contribute qualitatively to society. (A bit baldly, and narrowly, stated, but a significant part of my point.) Of course, in an increasingly global marketplace of trading, this probably does not have legs. I see the market as connecting investors with investments. Spending heavily to leverage momentary arbitrage does not, in my perspective, add significantly to the base function of the market. Such a stepped clock might also allow/aid some monitoring and capping of flash changes -- the continuing dread of many, that an unbalanced algorithm or combination will take the market down.

seanc 15y ago

It might sound like I'm quibbling, but while it is clear there are more algorithmic trades, the article does not provide any evidence that there are fewer human trades.

known 15y ago

"If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it." --Reagan