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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 f

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.
  - andylei 15y ago
    actually, if you read the next sentence, you'd see how they measure liquidity: > For large stocks in particular, algorithmic trading narrows spreads, reduces adverse selection, and reduces trade-related price discovery. its not just a question of who will buy, its a question of who will buy at what price. if you have more liquidity suppliers, spreads will thin and you'll pay less.
    - SHOwnsYou 15y ago
      That doesn't really show how they measure liquidity, but even if it did, I'm not particularly interested in how the framers of the article you linked measure liquidity. I freely admit that if you want to measure liquidity as the amount of buyers in the marketplace, then HFT definitely increases liquidity. However, to suggest that HFT is the only source of liquidity, as I've said twice before, is farcical. Also, it is totally accurate that HFTers reduce spread in the marketplace. They also increase the spread when they are driving the price of a stock up. Also, HFTers aren't unique to affecting the spread in the market. Every large scale buyer can change the spread. Not only that, but my original point regarding the provision of liquidity and HFTers claiming they provide the essential job of supplying it (ie: without HFT, there would be no buyers) and I used the short period of time of the average stock position holding to suggest that the liquidity exists regardless of the existence of HFT.
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.

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.
- andylei 15y ago
  actually, if you read the next sentence, you'd see how they measure liquidity: > For large stocks in particular, algorithmic trading narrows spreads, reduces adverse selection, and reduces trade-related price discovery. its not just a question of who will buy, its a question of who will buy at what price. if you have more liquidity suppliers, spreads will thin and you'll pay less.
  - SHOwnsYou 15y ago
    That doesn't really show how they measure liquidity, but even if it did, I'm not particularly interested in how the framers of the article you linked measure liquidity. I freely admit that if you want to measure liquidity as the amount of buyers in the marketplace, then HFT definitely increases liquidity. However, to suggest that HFT is the only source of liquidity, as I've said twice before, is farcical. Also, it is totally accurate that HFTers reduce spread in the marketplace. They also increase the spread when they are driving the price of a stock up. Also, HFTers aren't unique to affecting the spread in the market. Every large scale buyer can change the spread. Not only that, but my original point regarding the provision of liquidity and HFTers claiming they provide the essential job of supplying it (ie: without HFT, there would be no buyers) and I used the short period of time of the average stock position holding to suggest that the liquidity exists regardless of the existence of HFT.

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.