4 ms·

Wall Street firms are not "addicted" to faster trading: they NEED faster trading to keep up with the competition. That's not news. For as long as financial ma

by cs702 14y ago

Wall Street firms are not "addicted" to faster trading: they NEED faster trading to keep up with the competition. That's not news. For as long as financial markets have existed, market players have been in a never-ending technological arms race, constantly seeking to get information and execute trades faster, hopefully gaining a temporary advantage until the competition catches up. Leaving aside the hyped-up nature of this Wired article, there is a legitimate debate, ongoing, as to whether automated high-frequency trading is beneficial or detrimental to society. On one side of the debate, there are economists, regulators, and market participants who sincerely believe markets normally are, or otherwise tend toward, equilibrium, so allowing more trading motivated by profit, regardless of whether it's automated or not, makes markets more efficient and stable, which in their view is beneficial to society. On the other side of the debate, there are many critics (e.g., the late Benoit Mandlebrot, Nassim Nicholas Taleb, economist Steve Keen, Keynes biographer Lord Skidlesky, etc.) who believe markets are never in equilibrium, and can unexpectedly 'spin out of control' just like other highly complex, dynamic systems, so it's a terrible idea to have market stability relying on the second-to-second behavior of automated trading systems that can make decisions and act on them much, much faster than humans could ever react to a market debacle. In my view, the second group is right, but if anyone here disagrees, I'd love to hear their thoughts.

beagle3 14y ago
I do not agree with either view. Crashes happened in 1929, when everything was done on paper, and even long before that, when transactions took even longer to complete. Everything is faster these days, but it is not qualitatively different. "Benefit to society" is not, and never was, an optimization criterion to how markets are being run. Forget the rose tinted economics text books. The way markets have been run in the last 200 years or so (at least) is to benefit the big players. There are some benefits to society, such as a standardized way of raising money by companies that lets the investors remain liquid, as well as some standard forms of insurance (all derivatives are, one way or another, a form of insurance and COMPLETELY EQUIVALENTLY, a gamble, depending on how you view life). The problem is that it's a wild west now. There are a lot of laws on the books that are not being observed, or are being observed only against some players, but not others. There's a regulation that says any order you put into the market must have behind it the intention to execute. Now, please tell me how 10,000 order/cancel/order/cancel events per second (often with the same price but different quantities) can satisfy that regulation? I had been in algo trading for 7 years, and I'm not aware of a single plausible explanation, let alone one that would work for 50 firms, 250 days a year, 4 hours a day. Modern trading is a wild west casino. Regulators have been long ago captured, and the few that weren't appear to be either powerless, incompetent, corrupt or worse. (see: madoff w.r.t markopolos, the total lack of action against mfg/corzine - there are hundreds of examples; read zerohedge or denninger for new examples daily)
- cs702 14y ago
  beagle3: you make several great points, all of which, AFAICT, are in agreement with the second view: financial markets are inherently unstable -- and yes, regulatory capture, rampant fraud, and 'wild west casino' behavior are all factors contributing to instability -- speed just magnifies their impact. Many of the people in the second camp have made the same points as you in their calls for increased regulatory supervision and enforcement. Note that the years preceding the Crash of 1929, commonly referred to as the "Roaring 20's," were also years of 'wild west' behavior. Consider that the CEO of Chase National Bank, one Albert Wiggin, was caught secretly selling short his bank's stock in 1929, at the same time he was committing his bank's money to buying the bank's shares, and he did this through a Canadian shell company to avoid US taxes.[1] Or consider that the Chairman of the NY Stock Exchange, one Richard Whitney, was sent to jail at Sing-Sing for embezzlement in 1938.[2] The forced separation of commercial and investment banks by Glass-Steagall in 1933, the creation of the SEC in 1934, and the enactment of many investor- and market-protection laws and regulations via the Investment Company act of 1940, were all a response to the Crash of 1929 and the resulting Great Depression. The underlying assumption behind all these efforts was that Wall Street could not be left to its own devices. The country subsequently had decades of relative financial market stability: there were no crashes like 1929 until the regulatory apparatus was dismantled in the 1980's and 1990's, leading to the crisis of 2008. -- [1] http://en.wikipedia.org/wiki/Albert_Wiggin http://en.wikipedia.org/wiki/Albert_Wiggin [2] http://en.wikipedia.org/wiki/Richard_Whitney_%28financier%29 http://en.wikipedia.org/wiki/Richard_Whitney_%28financier%29
  - beagle3 14y ago
    > all of which, AFAICT, are in agreement with the second view: As you presented it, the speed is an important factor in the second view - I disagree. Proper regulations (assuming they are observed and diligently enforced) should be time-scale independent. Glass Steagall kept the system-as-a-whole safe -- e.g., it would have greatly reduced the effect of the "subprime" crisis (though sadly, blame lays just as much with the Clinton administration, which means GlassSteagall might not have helped). But is mostly unrelated to HFT - e.g. Knight Capital, which lost $440M million in the course of 45 minutes last week, would not have been subject to Glass Steagall. The fact that everything seemed stable does not indicate everything was indeed stable - e.g. Madoff was doing his thing for the last 17 years, and things blew up only because many people wanted to get their money back in the same time (as a result of their losses in other places). There is an interesting result from complex system theory, which is that when such a system breaks down, it always looks like there is a specific culprit / event, but the truth is that any one of hundreds of qualitatively different events would have started the ball rolling. All of the big banks (and most governments, including the US, Japan, UK) are bankrupt - or at least would be, if they were run like a business, no one dares admit it (although greece and ireland were already forced to, spain italy and portugal will need to admit that sooner than later). We will hopefully know the truth about this crisis in the future. It is unlikely that we will have a reasonable idea before 20 more years have passed (and especially the statute of criminal violations....), though.

by cs702 14y ago

beagle3 14y ago

I do not agree with either view. Crashes happened in 1929, when everything was done on paper, and even long before that, when transactions took even longer to complete. Everything is faster these days, but it is not qualitatively different. "Benefit to society" is not, and never was, an optimization criterion to how markets are being run. Forget the rose tinted economics text books. The way markets have been run in the last 200 years or so (at least) is to benefit the big players. There are some benefits to society, such as a standardized way of raising money by companies that lets the investors remain liquid, as well as some standard forms of insurance (all derivatives are, one way or another, a form of insurance and COMPLETELY EQUIVALENTLY, a gamble, depending on how you view life). The problem is that it's a wild west now. There are a lot of laws on the books that are not being observed, or are being observed only against some players, but not others. There's a regulation that says any order you put into the market must have behind it the intention to execute. Now, please tell me how 10,000 order/cancel/order/cancel events per second (often with the same price but different quantities) can satisfy that regulation? I had been in algo trading for 7 years, and I'm not aware of a single plausible explanation, let alone one that would work for 50 firms, 250 days a year, 4 hours a day. Modern trading is a wild west casino. Regulators have been long ago captured, and the few that weren't appear to be either powerless, incompetent, corrupt or worse. (see: madoff w.r.t markopolos, the total lack of action against mfg/corzine - there are hundreds of examples; read zerohedge or denninger for new examples daily)

cs702 14y ago
beagle3: you make several great points, all of which, AFAICT, are in agreement with the second view: financial markets are inherently unstable -- and yes, regulatory capture, rampant fraud, and 'wild west casino' behavior are all factors contributing to instability -- speed just magnifies their impact. Many of the people in the second camp have made the same points as you in their calls for increased regulatory supervision and enforcement. Note that the years preceding the Crash of 1929, commonly referred to as the "Roaring 20's," were also years of 'wild west' behavior. Consider that the CEO of Chase National Bank, one Albert Wiggin, was caught secretly selling short his bank's stock in 1929, at the same time he was committing his bank's money to buying the bank's shares, and he did this through a Canadian shell company to avoid US taxes.[1] Or consider that the Chairman of the NY Stock Exchange, one Richard Whitney, was sent to jail at Sing-Sing for embezzlement in 1938.[2] The forced separation of commercial and investment banks by Glass-Steagall in 1933, the creation of the SEC in 1934, and the enactment of many investor- and market-protection laws and regulations via the Investment Company act of 1940, were all a response to the Crash of 1929 and the resulting Great Depression. The underlying assumption behind all these efforts was that Wall Street could not be left to its own devices. The country subsequently had decades of relative financial market stability: there were no crashes like 1929 until the regulatory apparatus was dismantled in the 1980's and 1990's, leading to the crisis of 2008. -- [1] http://en.wikipedia.org/wiki/Albert_Wiggin http://en.wikipedia.org/wiki/Albert_Wiggin [2] http://en.wikipedia.org/wiki/Richard_Whitney_%28financier%29 http://en.wikipedia.org/wiki/Richard_Whitney_%28financier%29
- beagle3 14y ago
  > all of which, AFAICT, are in agreement with the second view: As you presented it, the speed is an important factor in the second view - I disagree. Proper regulations (assuming they are observed and diligently enforced) should be time-scale independent. Glass Steagall kept the system-as-a-whole safe -- e.g., it would have greatly reduced the effect of the "subprime" crisis (though sadly, blame lays just as much with the Clinton administration, which means GlassSteagall might not have helped). But is mostly unrelated to HFT - e.g. Knight Capital, which lost $440M million in the course of 45 minutes last week, would not have been subject to Glass Steagall. The fact that everything seemed stable does not indicate everything was indeed stable - e.g. Madoff was doing his thing for the last 17 years, and things blew up only because many people wanted to get their money back in the same time (as a result of their losses in other places). There is an interesting result from complex system theory, which is that when such a system breaks down, it always looks like there is a specific culprit / event, but the truth is that any one of hundreds of qualitatively different events would have started the ball rolling. All of the big banks (and most governments, including the US, Japan, UK) are bankrupt - or at least would be, if they were run like a business, no one dares admit it (although greece and ireland were already forced to, spain italy and portugal will need to admit that sooner than later). We will hopefully know the truth about this crisis in the future. It is unlikely that we will have a reasonable idea before 20 more years have passed (and especially the statute of criminal violations....), though.