8 ms·

Trading stocks is fantastically easier, sure. That is obvious. And he says so at the end: "There is value to trading automation. It is here to stay." He never s

by mej10 14y ago

Trading stocks is fantastically easier, sure. That is obvious. And he says so at the end: "There is value to trading automation. It is here to stay." He never says _trading_ is difficult. Your comment would be more interesting if it confronted his main point: "There is absolutely NO VALUE to High Frequency Trading. None. We need to bring our markets back to their original goals of creating capital for business. "

PaulHoule 14y ago
I think it's a miracle that you can ask for $500 dollars of a thinly traded stock and quite quickly get an offer to get it at $515. That's how market makers make money. They match up investors who want to buy and sell the amount they want to sell at the time they want to sell it. Contrast to the private corporation that I own shares in, where it's taken me weeks to broker a deal to buy some more shares from another shareholder -- including face to face meetings with many of the officers of the company. We had to have an accountant do the valuation and I ended up buying exactly the number of shares the other owner wanted to sell because this would mean more financing complexity and paperwork for the hardworking officers who should be spending their time building the business. Maybe your broker gets $10 and the market maker gets $15 but this is a bargain when you consider how much it would cost without them. Imagine trading on the New York Stock exchange when you were in San Francisco in 1860! Many low latency (high frequency) traders are market makers. Since the first successful offer gets the trade, you've got to be the fastest to survive at this game. One reason it's hard to make money as a trader is that as people find discover deviations from ideality and exploit them, the deviations go away. "Market neutral" strategies we quite successful through the 90's but are no longer profitable. Today I'm worried about the options market because trading in volatility may alter the relationship between implied and realized volatility and ruin another family of simple strategies that have performed well lately.
- crucialfelix 14y ago
  This really has nothing to do with retail investors. Retail is completely insignificant. Its about what the bulk of the trading is: robots trading with robots without any regard to the stocks they are trading. The big whales are the mutual funds and they have to execute their buy/sells using special techniques of spacing trades out to try to not show what they are up to. Otherwise the HFT spots it (and they usually do) and then front runs all of the trades, just skimming pennies off. What use are they ? The majority of the trades are not making markets at all, they are just zipping back and forth to collect pennies. If they were market makers then they would hold inventory, but they never do. NOBODY believes the "liquidity" story. and what about flooding the market with fake bids to cause opponents to get overloaded ? or running tracer LFOs spitting out strange bid patterns just to see if they can detect another hidden program ? what does that have to with market making ? its just robot games.
  - plc 14y ago
    All right, enough. The amount of ignorance out there about HFT is huge. I developed HFT algorithms in a previous life at a very large, well known bank. The majority of trades out there are in fact market making related. The ones that are market taking are usually at the expense of OTHER HFT algorithms, the ones that are slow and showing out dated prices. And yes, HFT algorithms most DEFINITELY hold inventory. Some don't, but most do. It's too expensive to get hit on a bid and then try to get rid of it right away. They often hold inventory for days, weeks, even months. I know this for a fact. I can't tell you know much time is spent on worrying about and managing the inventory HFT systems accumulate. HFT is immensely useful for large mutual funds. They replaced a broken system of high school dropouts who worked on the floor of the NYSE. Mutual funds HATED calling the floor, waiting an hour for execution, not knowing what was happening, and inevitably being taken for a ride. This is all public...go ahead and read a lot of the articles after Thain took over as president of the NYSE and gave tours of the floor to the large mutual fund managers...they were not impressed, to put it mildly. With HFT, you have transparency and immediacy. You put in an order, and you get that price. In the old days, mutual funds called in an order, and had no idea what they would get, it would be whatever fill the NYSE trader gave them. Executing orders throughout the day makes perfect sense, and is cheaper execution in the long term. You simply get a bad price if you try to sell a billion shares of MSFT in an instant, so instead you spread it over time. HFT does not front run in any way that is different than trading since the beginning of time. They are trying to understand if their is future demand, and adjusting their prices accordingly. You don't think that after being hit on a bid, the old NYSE floor traders didn't change their prices? They're doing the same exact thing as HFT does. There's a ton more to say about it, but these are just to counter some of your points.
    - maxerickson 14y ago
      If the HFT was hugely beating the buy mechanisms that mutual funds were using, I would expect the mutual funds to start looking to buy HFT services. I wonder how much of the dislike for HFT comes from applying intuition about 2 party trades to a many party market. Mostly, I think people ignore that the HFT systems are competing with each other, not just arbitrarily stepping into the middle of transactions. The latter really violates intuition about fairness.
- lifeisstillgood 14y ago
  I think everyone supports market making. And market makers should take a reward for holding onto a stock (even for a short period of time) But the benefits of market making tail off with frequency - would you mind waiting another hour for a deal at 518 or even a whole day? To a trader its unacceptable, to an investor, its a coffee break. But what drives HF trading is trading - as markets become more efficient trading opportunities, as you point out, vanish. So smaller amounts of arbitrage need to be leveraged with larger amounts of cash to get the same return. We want nice safe retail banks who make a tiny fraction on the movement of wages from company to employee to shops each year, and bundle it all up into mortgages and ATMs. They keep society oiled By the same token we (society) wants nice safe boring market makers. Who efficiently take a tiny fraction of each trade and keep liquidity in the markets for investors. I cannot prove it but the amount of margin gained for investors who hold for >1 year through the existence of HF trading is probably small - you can now get 515 offered quickly. 5 Years ago? 520? If that would have prevented you investing, maybe it was the wrong company.
  - tptacek 14y ago
    A lot of people support "market making", but then talk about frontrunning trades in situations that are morally and technically equivalent to market making. Computer nerds tend to assume the role of "market maker" is more formally defined than it really is. Really, there are just liquidity sellers and liquidity buyers.
    - wglb 14y ago
      And are obligated to stay in the market and provide liquidity, no matter what the circumstances.
      - makomk 14y ago
        Unfortunately, HFT firms playing at market maker don't actually have any obligation to stay in the market and provide liquidity. There are some people that want to see this changed (for example, I heard the head of the financial stability department at the Bank of England complaining about it on the radio the other day) but until then...
- makomk 14y ago
  The trouble is that that HFT is basically driving market makers out of business. Traditional market makers were obliged to continue trading even when the entire market had gone to shit, a service they could afford to provide thanks to their profits during normal market operations. The new breed of HFT firms that have displaced them don't do that, so as soon as the market goes a bit funny all the liquidity vanishes and people can't actually trade easily.
  - yummyfajitas 14y ago
    You say "traditional", I think you mean "designated" (or "specialist"). Designated market makers also received certain privileges, but in turn are obligated to maintain an orderly market. Historically, not all market makers were designated market makers. Some HFTs (e.g. some branches of Goldman) do act as designated market makers, receive these privileges, and are obliged to continue trading. Others do not. Same as always, just with machines replacing people.
harryh 14y ago
His main poing is wrong. High Frequency Trading makes trading stocks cheaper. There have always been market makers. They used to be expensive humans. Now they are cheap computers. This means that it now costs less for you to trade a stock.
- jackgavigan 14y ago
  There are still human market makers on the NYSE and some argue that their presence in that market makes it more stable.
- fennecfoxen 14y ago
  I'm given to understand that the reason we have high-frequency traders being as crazy as they are is that there's a (government-mandated) rule where you can't price anything in increments of less than $0.01. 1 penny times hundreds or thousands of shares starts a minute starts to add up. So instead of being able to compete on price, market-makers compete on latency in order to be the one making all the monies, resulting in the current arms race. Cf. this blog: http://www.chrisstucchio.com/blog/2012/subpenny_rule_responses.html http://www.chrisstucchio.com/blog/2012/subpenny_rule_respons...
  - dtby 14y ago
    If you do not know of what you speak, do not speak. Yes I am "dead" for expressing this reason.
  - dtby 14y ago
    If you do not know of what you speak, do not speak. Yes I am "dead" for expressing this reason.
  - Evbn 14y ago
    The 1 penny used to be 12.5 pennies, not long ago. That is yummifajita's blog, btw.
- digikata 14y ago
  By demanding automation, HFT drives down the operational cost of a particular transaction. However, for trades themselves, it's arguable that it drives up the cost of the overall transaction for long-term traders - especially those who end up needing to break up a larger overall stock transactions into smaller batches.

by mej10 14y ago

PaulHoule 14y ago

I think it's a miracle that you can ask for $500 dollars of a thinly traded stock and quite quickly get an offer to get it at $515. That's how market makers make money. They match up investors who want to buy and sell the amount they want to sell at the time they want to sell it. Contrast to the private corporation that I own shares in, where it's taken me weeks to broker a deal to buy some more shares from another shareholder -- including face to face meetings with many of the officers of the company. We had to have an accountant do the valuation and I ended up buying exactly the number of shares the other owner wanted to sell because this would mean more financing complexity and paperwork for the hardworking officers who should be spending their time building the business. Maybe your broker gets $10 and the market maker gets $15 but this is a bargain when you consider how much it would cost without them. Imagine trading on the New York Stock exchange when you were in San Francisco in 1860! Many low latency (high frequency) traders are market makers. Since the first successful offer gets the trade, you've got to be the fastest to survive at this game. One reason it's hard to make money as a trader is that as people find discover deviations from ideality and exploit them, the deviations go away. "Market neutral" strategies we quite successful through the 90's but are no longer profitable. Today I'm worried about the options market because trading in volatility may alter the relationship between implied and realized volatility and ruin another family of simple strategies that have performed well lately.

crucialfelix 14y ago
This really has nothing to do with retail investors. Retail is completely insignificant. Its about what the bulk of the trading is: robots trading with robots without any regard to the stocks they are trading. The big whales are the mutual funds and they have to execute their buy/sells using special techniques of spacing trades out to try to not show what they are up to. Otherwise the HFT spots it (and they usually do) and then front runs all of the trades, just skimming pennies off. What use are they ? The majority of the trades are not making markets at all, they are just zipping back and forth to collect pennies. If they were market makers then they would hold inventory, but they never do. NOBODY believes the "liquidity" story. and what about flooding the market with fake bids to cause opponents to get overloaded ? or running tracer LFOs spitting out strange bid patterns just to see if they can detect another hidden program ? what does that have to with market making ? its just robot games.
- plc 14y ago
  All right, enough. The amount of ignorance out there about HFT is huge. I developed HFT algorithms in a previous life at a very large, well known bank. The majority of trades out there are in fact market making related. The ones that are market taking are usually at the expense of OTHER HFT algorithms, the ones that are slow and showing out dated prices. And yes, HFT algorithms most DEFINITELY hold inventory. Some don't, but most do. It's too expensive to get hit on a bid and then try to get rid of it right away. They often hold inventory for days, weeks, even months. I know this for a fact. I can't tell you know much time is spent on worrying about and managing the inventory HFT systems accumulate. HFT is immensely useful for large mutual funds. They replaced a broken system of high school dropouts who worked on the floor of the NYSE. Mutual funds HATED calling the floor, waiting an hour for execution, not knowing what was happening, and inevitably being taken for a ride. This is all public...go ahead and read a lot of the articles after Thain took over as president of the NYSE and gave tours of the floor to the large mutual fund managers...they were not impressed, to put it mildly. With HFT, you have transparency and immediacy. You put in an order, and you get that price. In the old days, mutual funds called in an order, and had no idea what they would get, it would be whatever fill the NYSE trader gave them. Executing orders throughout the day makes perfect sense, and is cheaper execution in the long term. You simply get a bad price if you try to sell a billion shares of MSFT in an instant, so instead you spread it over time. HFT does not front run in any way that is different than trading since the beginning of time. They are trying to understand if their is future demand, and adjusting their prices accordingly. You don't think that after being hit on a bid, the old NYSE floor traders didn't change their prices? They're doing the same exact thing as HFT does. There's a ton more to say about it, but these are just to counter some of your points.
  - maxerickson 14y ago
    If the HFT was hugely beating the buy mechanisms that mutual funds were using, I would expect the mutual funds to start looking to buy HFT services. I wonder how much of the dislike for HFT comes from applying intuition about 2 party trades to a many party market. Mostly, I think people ignore that the HFT systems are competing with each other, not just arbitrarily stepping into the middle of transactions. The latter really violates intuition about fairness.
lifeisstillgood 14y ago
I think everyone supports market making. And market makers should take a reward for holding onto a stock (even for a short period of time) But the benefits of market making tail off with frequency - would you mind waiting another hour for a deal at 518 or even a whole day? To a trader its unacceptable, to an investor, its a coffee break. But what drives HF trading is trading - as markets become more efficient trading opportunities, as you point out, vanish. So smaller amounts of arbitrage need to be leveraged with larger amounts of cash to get the same return. We want nice safe retail banks who make a tiny fraction on the movement of wages from company to employee to shops each year, and bundle it all up into mortgages and ATMs. They keep society oiled By the same token we (society) wants nice safe boring market makers. Who efficiently take a tiny fraction of each trade and keep liquidity in the markets for investors. I cannot prove it but the amount of margin gained for investors who hold for >1 year through the existence of HF trading is probably small - you can now get 515 offered quickly. 5 Years ago? 520? If that would have prevented you investing, maybe it was the wrong company.
- tptacek 14y ago
  A lot of people support "market making", but then talk about frontrunning trades in situations that are morally and technically equivalent to market making. Computer nerds tend to assume the role of "market maker" is more formally defined than it really is. Really, there are just liquidity sellers and liquidity buyers.
  - wglb 14y ago
    And are obligated to stay in the market and provide liquidity, no matter what the circumstances.
    - makomk 14y ago
      Unfortunately, HFT firms playing at market maker don't actually have any obligation to stay in the market and provide liquidity. There are some people that want to see this changed (for example, I heard the head of the financial stability department at the Bank of England complaining about it on the radio the other day) but until then...
makomk 14y ago
The trouble is that that HFT is basically driving market makers out of business. Traditional market makers were obliged to continue trading even when the entire market had gone to shit, a service they could afford to provide thanks to their profits during normal market operations. The new breed of HFT firms that have displaced them don't do that, so as soon as the market goes a bit funny all the liquidity vanishes and people can't actually trade easily.
- yummyfajitas 14y ago
  You say "traditional", I think you mean "designated" (or "specialist"). Designated market makers also received certain privileges, but in turn are obligated to maintain an orderly market. Historically, not all market makers were designated market makers. Some HFTs (e.g. some branches of Goldman) do act as designated market makers, receive these privileges, and are obliged to continue trading. Others do not. Same as always, just with machines replacing people.

harryh 14y ago

His main poing is wrong. High Frequency Trading makes trading stocks cheaper. There have always been market makers. They used to be expensive humans. Now they are cheap computers. This means that it now costs less for you to trade a stock.

jackgavigan 14y ago
There are still human market makers on the NYSE and some argue that their presence in that market makes it more stable.
fennecfoxen 14y ago
I'm given to understand that the reason we have high-frequency traders being as crazy as they are is that there's a (government-mandated) rule where you can't price anything in increments of less than $0.01. 1 penny times hundreds or thousands of shares starts a minute starts to add up. So instead of being able to compete on price, market-makers compete on latency in order to be the one making all the monies, resulting in the current arms race. Cf. this blog: http://www.chrisstucchio.com/blog/2012/subpenny_rule_responses.html http://www.chrisstucchio.com/blog/2012/subpenny_rule_respons...
- dtby 14y ago
  If you do not know of what you speak, do not speak. Yes I am "dead" for expressing this reason.
- dtby 14y ago
  If you do not know of what you speak, do not speak. Yes I am "dead" for expressing this reason.
- Evbn 14y ago
  The 1 penny used to be 12.5 pennies, not long ago. That is yummifajita's blog, btw.
digikata 14y ago
By demanding automation, HFT drives down the operational cost of a particular transaction. However, for trades themselves, it's arguable that it drives up the cost of the overall transaction for long-term traders - especially those who end up needing to break up a larger overall stock transactions into smaller batches.