5 ms·

How is making 29,000 trades per second good for the market? It seems like trading at that frequency should be illegal.

tedunangst 15y ago
I believe that number is all trades by all participants.
fleitz 15y ago
Why should trading at that frequency be illegal? What is the optimal amount of trades per second one should be making? Once per second? Once per minute? Once per year? Even if there were such a number how could any bureaucrat ever arrive at the optimal frequency any particular market participant should be trading at?
- ars 15y ago
  Just add a sales tax on stock.
  - anonymoushn 15y ago
    You'll just make the spread larger by the amount of the tax. Why is this a good thing?
    - EvilTerran 15y ago
      While it would make the spread larger, I disagree with your use of the word "just". It would have many other effects as well - for one thing, it'd make trades on small shifts in value (ie less than twice the sales tax) unprofitable. That would make HFT much less attractive at the ridiculous frequencies it happens currently, as you'd need to hold on to stock for longer for it to shift enough for the gross gain to exceed the sales tax. I suspect that's the effect ars had in mind. Also, you could always put the tax into a kitty for bailing out the financial institutions who're engaging in this lark the next time they mess it up ;)
      - anonymoushn 15y ago
        That would make HFT much less attractive at the ridiculous frequencies it happens currently, as you'd need to hold on to stock for longer for it to shift enough for the gross gain to exceed the sales tax. This is true if for some reason the HFT wants to take liquidity on both sides of the trade. In reality, the HFT will probably add liquidity on both sides of the trade, making a profit equal to the true spread plus any change in price. Moves of one tenth of a cent will continue to be massively profitable for the HFT, but the HFT's counterparty will have to pay a much larger spread. One group of people who commonly take liquidity on both sides of the transaction are retail investors, so they would end up taking a great deal of the losses created by this tax.
        EvilTerran 15y ago
        I must admit to being a bit of a layperson when it comes to the dark arts of finance, so I may well be completely wrong. I was mostly going off my recollections of my high school economics teacher saying something to the effect of "tax on a transaction reduces the market size - for example, tobacco & alcohol duties serve to reduce usage of both products". Would that not apply for some reason when the product in question is stock trades?
        anonymoushn 15y ago
        It's probably true that less trades would occur, and HFT profits would probably be reduced by this, but they would be able to mostly avoid paying the tax. What follows is full of holes but is a mostly correct explanation of what I was talking about before. Each venue maintains an "order book" for each security that trades on the venue. The order book consists of a number of standing orders, either orders to buy at $k or orders to sell at $j (k<j, with many distinct values of j and k). These orders which sit on the book because they do not have a counterparty are called "add liquidity." When you want to just execute the trade and you don't mind the spread, you place an order that crosses the spread and transact with the person who has the best standing order (selling for the least money or buying for the most money) of all the standing orders. This is called "take liquidity." My impression, which may not be correct, but which forms the basis for my previous response, is that the HFT industry primarily plays the add side right now and that most firms only take liquidity to close out positions when they are unable to close them out by adding liquidity.
- yskchu 15y ago
  Even though it will be hard to determine the optimal amount of trading per second, you have to agree that the situation now is far from normal. One of the most important economic benefit, and function of the stock market, is to allow companies to raise capital. High frequency trading does nothing to promote this goal. In some sense the stock market today is more like a gambling hall.
  - seanalltogether 15y ago
    I completely agree. There are a fair amount of investors that are going after a percentage of a company, they are making investments that can actually propel a company forward. The rest of us are gambling on a popularity contest.
  - creamyhorror 15y ago
    Well said. As in some casinos, in the world's stock markets some big players (probably including certain HFTs and hedge funds) take much more of the winnings than small ones, due to information asymmetry or pure competitive advantage (e.g. due to extremely fast trading and advanced algorithms). The more money is sucked from the market by intelligent arbitrageurs/gamblers, the less there is for small(er) investors. That's a bad thing in itself and also increases the focus on financial gameplay (analysis of market trends and fads) to the detriment of investment (analysis of the worth of companies). Frothy, ever-rising stock markets attract investment away from other markets, usually for poor reasons: the traded companies haven't done anything that would justify such rapid and significant changes in their stock values. The point of the stock market is not to let the smartest people profit from the rest; it's to allow companies to raise capital efficiently and fairly. If we tweak the rules of the market, by limiting trade frequency for example, we may be able to push the play in the market towards a form that aligns better with this core function of the market. Finally, I want to reiterate that for a closed population, the stock market is a zero-sum game. Money made is won from someone else, always. edit: i'd appreciate you mentioning the points you disagree with when you give your downvotes - thanks
    - franticpedantic 15y ago
      I didn't downvote you, but you're wrong for a huge variety of reasons. Firstly and most importantly, the stock market is not zero-sum.I don't know why you think it is.Equities in companies ideally (and historically) grow in real value.This is basic common sense.If your friend sells you a stake in his company, you have an ad-hoc stock market (a buyer and a seller for company equity). Is one of you destined to lose in this deal? Or can the company do well and you both succeed? What's going on with HFT is not a novel way to exploit the system. Financial pros will always get the information sooner and be able to act on it more quickly/efficiently than retail investors. People who suggest otherwise are deluding people for political purposes. Before computers existed, people on Wall Street still got the information first and acted on it first. What computers have done is made the whole thing quicker and more convenient. If you want to fill an order you are much more likely to be able to. Those advanced algorithms help make sure things are correctly priced which is good for buyers and sellers. The companies looking for investment benefit from this. The smaller investors aren't hurt by this at all from this, assuming they are trying to invest in value and not take advantage of arbitrage opportunity. Contributing liquidity and pricing information to the market is valuable. Some people do it faster and better than others and so they profit from it. It's unclear to me why they need to do a worse job of it so that other people can share in this value. Should Google be limited to only providing so many search results a day so that other small(er) search engines can get some of the wealth too? What exactly is the problem, besides the general popularity of banking fear-mongering recently?
- Iv 15y ago
  Does the intrinsic value of a company change 29 000 times per second ? is this signal or noise ? Trading once per day and randomizing the order of trades would work nicely I think. There was a recent very good example of this concerning Apple : When Steve Jobs died, they kept the information secret and agreed with the stock exchange to suspend trading for a day. The time for everyone to think about what it meant for the company instead of hysterically following a random trend. A big event, obviously changing the company's intrinsic value, was interpreted with a daily period. Everything I read about high frequency trading indicates that it is mainly noise. I mean, stock exchanges close at night and during week ends. There are 48 hours without quotations. How does one concile that with nano-second trading.
  - tedunangst 15y ago
    If it's mainly noise, why do you care? What I find most amazing is that the stock market is relatively small, yet people have strong opinions about it while ignoring much larger markets. There's some adage about how if you can't measure it, it doesn't exist or something. If CNN doesn't run a ticker for some market, I guess it doesn't matter.
    - prodigal_erik 15y ago
      I care if all my 401(k) alternatives are in markets being parasitized by HFTs who have learned to exploit execution flaws and attack the confidentiality of the order book. Less selfishly, I care if HFTs are diverting society's resources away from the effective producers the market exists to support.
      - anonymoushn 15y ago
        Less selfishly, I care if HFTs are diverting society's resources away from the effective producers the market exists to support. Unfortunately, there's gold in them there microseconds.
    - Iv 15y ago
      For the same reason you minimize noise to prevent Larsen effects : It is noise that can have feedback effects.

I believe that number is all trades by all participants.

Why should trading at that frequency be illegal? What is the optimal amount of trades per second one should be making? Once per second? Once per minute? Once per year? Even if there were such a number how could any bureaucrat ever arrive at the optimal frequency any particular market participant should be trading at?

ars 15y ago
Just add a sales tax on stock.
- anonymoushn 15y ago
  You'll just make the spread larger by the amount of the tax. Why is this a good thing?
  - EvilTerran 15y ago
    While it would make the spread larger, I disagree with your use of the word "just". It would have many other effects as well - for one thing, it'd make trades on small shifts in value (ie less than twice the sales tax) unprofitable. That would make HFT much less attractive at the ridiculous frequencies it happens currently, as you'd need to hold on to stock for longer for it to shift enough for the gross gain to exceed the sales tax. I suspect that's the effect ars had in mind. Also, you could always put the tax into a kitty for bailing out the financial institutions who're engaging in this lark the next time they mess it up ;)
    - anonymoushn 15y ago
      That would make HFT much less attractive at the ridiculous frequencies it happens currently, as you'd need to hold on to stock for longer for it to shift enough for the gross gain to exceed the sales tax. This is true if for some reason the HFT wants to take liquidity on both sides of the trade. In reality, the HFT will probably add liquidity on both sides of the trade, making a profit equal to the true spread plus any change in price. Moves of one tenth of a cent will continue to be massively profitable for the HFT, but the HFT's counterparty will have to pay a much larger spread. One group of people who commonly take liquidity on both sides of the transaction are retail investors, so they would end up taking a great deal of the losses created by this tax.
      - EvilTerran 15y ago
        I must admit to being a bit of a layperson when it comes to the dark arts of finance, so I may well be completely wrong. I was mostly going off my recollections of my high school economics teacher saying something to the effect of "tax on a transaction reduces the market size - for example, tobacco & alcohol duties serve to reduce usage of both products". Would that not apply for some reason when the product in question is stock trades?
        anonymoushn 15y ago
        It's probably true that less trades would occur, and HFT profits would probably be reduced by this, but they would be able to mostly avoid paying the tax. What follows is full of holes but is a mostly correct explanation of what I was talking about before. Each venue maintains an "order book" for each security that trades on the venue. The order book consists of a number of standing orders, either orders to buy at $k or orders to sell at $j (k<j, with many distinct values of j and k). These orders which sit on the book because they do not have a counterparty are called "add liquidity." When you want to just execute the trade and you don't mind the spread, you place an order that crosses the spread and transact with the person who has the best standing order (selling for the least money or buying for the most money) of all the standing orders. This is called "take liquidity." My impression, which may not be correct, but which forms the basis for my previous response, is that the HFT industry primarily plays the add side right now and that most firms only take liquidity to close out positions when they are unable to close them out by adding liquidity.
yskchu 15y ago
Even though it will be hard to determine the optimal amount of trading per second, you have to agree that the situation now is far from normal. One of the most important economic benefit, and function of the stock market, is to allow companies to raise capital. High frequency trading does nothing to promote this goal. In some sense the stock market today is more like a gambling hall.
- seanalltogether 15y ago
  I completely agree. There are a fair amount of investors that are going after a percentage of a company, they are making investments that can actually propel a company forward. The rest of us are gambling on a popularity contest.
- creamyhorror 15y ago
  Well said. As in some casinos, in the world's stock markets some big players (probably including certain HFTs and hedge funds) take much more of the winnings than small ones, due to information asymmetry or pure competitive advantage (e.g. due to extremely fast trading and advanced algorithms). The more money is sucked from the market by intelligent arbitrageurs/gamblers, the less there is for small(er) investors. That's a bad thing in itself and also increases the focus on financial gameplay (analysis of market trends and fads) to the detriment of investment (analysis of the worth of companies). Frothy, ever-rising stock markets attract investment away from other markets, usually for poor reasons: the traded companies haven't done anything that would justify such rapid and significant changes in their stock values. The point of the stock market is not to let the smartest people profit from the rest; it's to allow companies to raise capital efficiently and fairly. If we tweak the rules of the market, by limiting trade frequency for example, we may be able to push the play in the market towards a form that aligns better with this core function of the market. Finally, I want to reiterate that for a closed population, the stock market is a zero-sum game. Money made is won from someone else, always. edit: i'd appreciate you mentioning the points you disagree with when you give your downvotes - thanks
  - franticpedantic 15y ago
    I didn't downvote you, but you're wrong for a huge variety of reasons. Firstly and most importantly, the stock market is not zero-sum.I don't know why you think it is.Equities in companies ideally (and historically) grow in real value.This is basic common sense.If your friend sells you a stake in his company, you have an ad-hoc stock market (a buyer and a seller for company equity). Is one of you destined to lose in this deal? Or can the company do well and you both succeed? What's going on with HFT is not a novel way to exploit the system. Financial pros will always get the information sooner and be able to act on it more quickly/efficiently than retail investors. People who suggest otherwise are deluding people for political purposes. Before computers existed, people on Wall Street still got the information first and acted on it first. What computers have done is made the whole thing quicker and more convenient. If you want to fill an order you are much more likely to be able to. Those advanced algorithms help make sure things are correctly priced which is good for buyers and sellers. The companies looking for investment benefit from this. The smaller investors aren't hurt by this at all from this, assuming they are trying to invest in value and not take advantage of arbitrage opportunity. Contributing liquidity and pricing information to the market is valuable. Some people do it faster and better than others and so they profit from it. It's unclear to me why they need to do a worse job of it so that other people can share in this value. Should Google be limited to only providing so many search results a day so that other small(er) search engines can get some of the wealth too? What exactly is the problem, besides the general popularity of banking fear-mongering recently?
Iv 15y ago
Does the intrinsic value of a company change 29 000 times per second ? is this signal or noise ? Trading once per day and randomizing the order of trades would work nicely I think. There was a recent very good example of this concerning Apple : When Steve Jobs died, they kept the information secret and agreed with the stock exchange to suspend trading for a day. The time for everyone to think about what it meant for the company instead of hysterically following a random trend. A big event, obviously changing the company's intrinsic value, was interpreted with a daily period. Everything I read about high frequency trading indicates that it is mainly noise. I mean, stock exchanges close at night and during week ends. There are 48 hours without quotations. How does one concile that with nano-second trading.
- tedunangst 15y ago
  If it's mainly noise, why do you care? What I find most amazing is that the stock market is relatively small, yet people have strong opinions about it while ignoring much larger markets. There's some adage about how if you can't measure it, it doesn't exist or something. If CNN doesn't run a ticker for some market, I guess it doesn't matter.
  - prodigal_erik 15y ago
    I care if all my 401(k) alternatives are in markets being parasitized by HFTs who have learned to exploit execution flaws and attack the confidentiality of the order book. Less selfishly, I care if HFTs are diverting society's resources away from the effective producers the market exists to support.
    - anonymoushn 15y ago
      Less selfishly, I care if HFTs are diverting society's resources away from the effective producers the market exists to support. Unfortunately, there's gold in them there microseconds.
  - Iv 15y ago
    For the same reason you minimize noise to prevent Larsen effects : It is noise that can have feedback effects.