4 ms·

Putting the Brakes on High Frequency Trading

38 points by elfinlike 14y ago

raintrees 14y ago
Or, implement Mark Cuban's 10 US cents per trade cost idea. http://news.ycombinator.com/item?id=2862003 http://news.ycombinator.com/item?id=2862003 No more problem. And it could be harder to game than taxing profits after the fact...
- superprime 14y ago
  It's not really his idea, but it's probably a good one. I remembered it as being called a Tobin tax, but that really only applies to currency exchange. Instead, it's just a securities transaction tax: http://en.wikipedia.org/wiki/Financial_transaction_tax#Securities_transaction_tax http://en.wikipedia.org/wiki/Financial_transaction_tax#Secur... .
- NelsonMinar 14y ago
  The European Union is seriously considering adding a 0.1% tax against trades in stocks and bonds (and an 0.01% tax on derivatives). It would definitely curb HFT, and there's talk of it also generating needed revenue. The main criticism is that a transaction tax distorts the market in hard to predict ways, and that big players may work around it. The English Wikipedia article has a decent summary of the proposal status: http://en.wikipedia.org/wiki/European_Union_financial_transaction_tax http://en.wikipedia.org/wiki/European_Union_financial_transa...
  - taw9 14y ago
    That will just kill liquidity and bias the market further towards larger agents. EU is going to shit anyways, so I'm all for it. Fug Capitalism. Viva 99%. (sarcasm intended)
- taw9 14y ago
  It would also kill liquidity, which means next time we go into a recession and you hit the panic button on your 401k, I won't have a resting bid to catch you. The problem isn't HFT, but rather dumb investors (like your pension fund) and bad vehicles (like leveraged ETFs and volatility-linked equity). Getting a good price is about subtle presentation of intent. If you're not willing to be subtle, you get what you deserve. Generally, pension funds choose the path of least intelligence and actually believe the sell side. As for individual investors, if you don't know the difference between a market order and a limit order, you shouldn't be allowed to trade. Better yet, exchanges shouldn't allow market orders. Soros wants the Tobin tax too... that alone should be a big red flag. The general public seems to think that regulations are written by "the people". Bullshit. They're written for "the people" by GS, JPM, etc... corporate lawyers will craft whatever implementation we get stuck with. Caveat trado!
- rdm70 14y ago
  Unintended consequences alert: read up on the UK stamp duty on UK equity trades. Goldman Sachs creates a derivative security matching the return of the underlying equity that you can trade with GS and avoid paying the stamp duty. Net result: GS makes money, less liquidity for the average investor. Rock on transaction taxes.
  - moe 14y ago
    Goldman Sachs creates a derivative security matching the return of the underlying equity So Goldman Sachs is using a loophole, how surprising. What is your point, though? Should we not make laws that can potentially have loopholes?
niggler 14y ago
As with most things, this addresses symptoms and not the actual underlying problems. HFT have exposed all kinds of problems which existed since the inception of the various markets but only appeared recently. For example, Regulation NMS is an important rule that was introduced to solve a major problem (ensuring price fairness in a decentralized environment) but it didn't make sense back then. However, given the physical constraints, the problems weren't apparent. Now HFT has highlighted the broken nature of the regulation. The right solution is to force a re-centralization of the exchanges, but instead of that people are pushing to stop HFT.
fleitz 14y ago
Who cares if institutional traders can't figure out why the price is moving. All traders do is arbitrage, computers are much better at spotting arbitrage opportunities than humans are. That institutional traders can't figure it out merely points to their irrelevance. Now, on the other hand what we should be concerned about is if HFT is ruining the investment climate and since companies rarely offer their stock it almost certainly has no effect on the investment climate which looks at the macro conditions across years rather than the microclimate of the next few minutes as traders do. The price of a stock, or the value of an index at any point in time has almost no relevance to the economy as a whole. What matters is that over long periods of time these companies deliver great value to their customers. Lets worry about GS, et al, selling stock that doesn't exist (naked shorting) before we worry about HFT.
raymondh 14y ago
This article is long on inflammatory language and short on analysis or evidence. There are plenty of real issues with HFT as currently practiced (front-running data feeds, gaming with flickering orders, dark pools, etc). However, the article ignores these real issues and suggests that liquidity itself is a bad thing (or something not worth having). Liquidity means having the ability to transfer an asset quickly with minimal loss of value. Anyone who invests wants a liquid market -- illiquid securities are notoriously problematic. The article is misleading. It is the absence of liquidity that is a disaster. Market crashes are what happens when liquidity dries up. Just ask anyone who was trying to sell their house last year. As long as the rules are fair (no front-running, preferential trades, equal access, etc), every market participant adds value. Markets are auctions and auctions run best when there are active bidders.
- dchichkov 14y ago
  I doubt that HFT traders really engage into frontrunning or market manipulation. It is illegal. Supporting HFT infrastructure R&D is expensive. And takes nontrivial effort. It is simply too risky to engage in illegal activities. Edit: no point -> too risky
  - niggler 14y ago
    "There is simply no point engaging into illegal activities." There are many major firms such as SAC capital that built a business around insider trading (which is also illegal). Just yesterday: http://www.businessweek.com/news/2012-10-02/ex-sac-capital-manager-tells-fbi-fund-used-insider-data http://www.businessweek.com/news/2012-10-02/ex-sac-capital-m...
    - dchichkov 14y ago
      Unlike HFT, insider trading doesn't require investment into infrastructure and R&D.
      - s_baby 14y ago
tsotha 14y ago
I don't see the point of worrying about volatility. The price moves and people don't know why. So what? I don't care if traders get heartburn - that's part of the job. The real problem with HFT is its basic unfairness. Firms that aren't physically located near the exchanges are at a disadvantage, as well as individuals located anywhere. I like Glenn Reynolds' idea of adding a randomized delay of up to one second to every trade.
- damoncali 14y ago
  Volatility is reflected in value, which I suspect you care very much about.
  - tsotha 14y ago
    I'm not sure what you mean by that. What I care about is how my asset does over the long run. If it goes up 10% today and down 10% tomorrow, I really don't care.
dave_sullivan 14y ago
Is there really a problem here that's worth regulating? They point out flash crashes as being a big problem--those flash crashes quickly correct themselves back to their "true" value (whatever that means), and the people most hurt are the people who were using bad algorithms and took risks they didn't understand, Knight Capital being a recent example. They reference volume being much higher than it ever has been on account of hft, which is true. But what does that have to do with the bubble of the 90s? Higher volume != stock market ruin. Then there's the small time investor getting hurt. But are they really? The whims of the market now occur because of algorithmic trading as opposed to before, when the whims of the market occurred because of--who knows? Small time investors have been winning and losing since the system was invented. Markets can and always will be fickle. So again, what exactly is the problem here?
- YouWontSeeThis 14y ago
  The point of the stock market is to invest in companies, not extract value from the public. The benefits of HFT have run their course, now it's simply a tax on the small traders who want to get into the market. What is the benefit?
- damoncali 14y ago
  Knight almost blinked out of existence due to computers screwing up. Why is it a stretch to think that far worse catastrophes are also likely to happen at some point? The systematic risk is large, and the benefit is near zero.
- gergles 14y ago
  You have 100 shares of FOO. It is trading at $50. You bought it at $40, so you have a stop-loss order to sell it at $35. Some "liquidity provider"'s algorithm goes haywire and the price drops to $30. The exchange's "circuit breakers" halt trading or revert the trades, and then the price quickly goes back up to $50. Unfortunately for you, your brokerage's computer saw the price drop, executed your stop-loss order, and put your shares up for sale, which were then purchased by another 'liquidity provider' (or hell, maybe even the same one that caused the value to drop in the first place). You've now lost $1500 because of HFT. Your trade can't be reverted, because fuck you, that's why, but the holy "market makers" get their trades rolled back so that their rich friends don't suffer anything for their alogrithmic fail.
tvladeck 14y ago
Want less emphasis on speed? Let tick marks be less than $0.01. Market-makers are clearly willing to provide spreads of less than $0.01. Any time the price of something is artificially moved out of market equilibrium, there will be queueing (either to buy or sell the good). In this case, there is queuing to provide liquidity, and market-makers have every incentive to try and jump the queue. Instead of competing on price (they can't), they compete on speed.
zacharyvoase 14y ago
I'm happy that there seems to be some discontent here on the substance of this article. Indeed, we perceive market 'crashes' to be negative, but in fact they (necessarily) benefit as many people as they hurt. Being able to obtain stock in a company for fewer US$ can be a good thing. And who's to say that banning algorithmic trading will prevent rapid swings in the market? They happened before algorithmic trading was here, and they will happen afterwards. All of this rhetoric seems to be a knee-jerk reaction to something the author is incapable of grokking (no doubt due to a limited human capacity to do so).
- krickle 14y ago
  HFT crashes do not benefit or hurt anyone, since they are rolled back.
  - zacharyvoase 14y ago
    I'm almost certain this statement is incorrect. 1) Just because a price reverts to a previous value does not mean that no-one benefited or was hurt from the fact that it fell or increased in between. 2) The 'rolling back' of an HFT-prompted crash (the causal link being debatable anyway) is not guaranteed at all.
dlauer 14y ago
I would like to say that I was misquoted in this op-ed. I have never said that "high-speed technology was “a destructive force in the market” with “no social benefit.”" I said that there is a limit to the benefit of speed, and we're finding that the latency race to 0 has found that limit.
- elfinlike 14y ago
  I believe this is the entire quote: "The new electronic marketplace has several structural inefficiencies. These are what have permitted HFT to become a destructive force in the market, rather than a passive liquidity providing mechanism. This should not be construed to say that all HFT is bad, but there are 2 important points to make – the structural inefficiencies present in the market have created a massive misallocation of resources into technology that provides no social benefit, and structural deficiencies in market structure have allowed for nefarious or accidental actions to disrupt the market". I agree there are some contextual problems with the citation in the article. Retrieved from http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=f8a5cef9-291d-4dd3-ad3b-10b55c86d23e&Witness_ID=e514e57c-14e7-4a29-b75d-e5531e6b1cff http://banking.senate.gov/public/index.cfm?FuseAction=Hearin...
aleyan 14y ago
For every trade you will incur some transaction cost. You may think that even though there is a Bid and an Ask price, you may on average get somewhere in the middle, but you don't. Your buy trades are likely to be filled on the Ask price and your sell trades are likely to be filled on the Bid price because some intermediary will get in between and pocket the spread. This has been the case, this is the case, and I haven't seen viable solutions to this what so ever. What has changed over the past decade is who that intermediary is and how much of the spread they can steal. In 2001 New York Stock Exchange reduced the minimum listed price increments from $1/8 to $.01 . This spread used to be collected by exchange "specialists" with inherited seats on the floor for providing liquidity. The rise of alternative exchanges and computers allowed third parties to cut in to provide liquidity with smaller spreads and cutting out the specialists. These third parties are high frequency traders. Investors are still loosing the spread on each trade they make, but it is so much less than it used to be. There are issues with the market microstructures that could be addressed, but trying to push computer generated should not be it. I for one, never want to go back to the dark days of specialists and their $.125 and $.25 spreads. PS. This was a discussion of the minimum transaction cost you can have. Additionally you may have to pay fees to your broker ( especially if you are retail and don't trade a lot ). If you are trading lots of shares at a clip you will also encounter costs from the market impact of your trades.

38 points by elfinlike 14y ago

Or, implement Mark Cuban's 10 US cents per trade cost idea. http://news.ycombinator.com/item?id=2862003 http://news.ycombinator.com/item?id=2862003 No more problem. And it could be harder to game than taxing profits after the fact...

superprime 14y ago
It's not really his idea, but it's probably a good one. I remembered it as being called a Tobin tax, but that really only applies to currency exchange. Instead, it's just a securities transaction tax: http://en.wikipedia.org/wiki/Financial_transaction_tax#Securities_transaction_tax http://en.wikipedia.org/wiki/Financial_transaction_tax#Secur... .
NelsonMinar 14y ago
The European Union is seriously considering adding a 0.1% tax against trades in stocks and bonds (and an 0.01% tax on derivatives). It would definitely curb HFT, and there's talk of it also generating needed revenue. The main criticism is that a transaction tax distorts the market in hard to predict ways, and that big players may work around it. The English Wikipedia article has a decent summary of the proposal status: http://en.wikipedia.org/wiki/European_Union_financial_transaction_tax http://en.wikipedia.org/wiki/European_Union_financial_transa...
- taw9 14y ago
  That will just kill liquidity and bias the market further towards larger agents. EU is going to shit anyways, so I'm all for it. Fug Capitalism. Viva 99%. (sarcasm intended)
taw9 14y ago
It would also kill liquidity, which means next time we go into a recession and you hit the panic button on your 401k, I won't have a resting bid to catch you. The problem isn't HFT, but rather dumb investors (like your pension fund) and bad vehicles (like leveraged ETFs and volatility-linked equity). Getting a good price is about subtle presentation of intent. If you're not willing to be subtle, you get what you deserve. Generally, pension funds choose the path of least intelligence and actually believe the sell side. As for individual investors, if you don't know the difference between a market order and a limit order, you shouldn't be allowed to trade. Better yet, exchanges shouldn't allow market orders. Soros wants the Tobin tax too... that alone should be a big red flag. The general public seems to think that regulations are written by "the people". Bullshit. They're written for "the people" by GS, JPM, etc... corporate lawyers will craft whatever implementation we get stuck with. Caveat trado!
rdm70 14y ago
Unintended consequences alert: read up on the UK stamp duty on UK equity trades. Goldman Sachs creates a derivative security matching the return of the underlying equity that you can trade with GS and avoid paying the stamp duty. Net result: GS makes money, less liquidity for the average investor. Rock on transaction taxes.
- moe 14y ago
  Goldman Sachs creates a derivative security matching the return of the underlying equity So Goldman Sachs is using a loophole, how surprising. What is your point, though? Should we not make laws that can potentially have loopholes?

niggler 14y ago

As with most things, this addresses symptoms and not the actual underlying problems. HFT have exposed all kinds of problems which existed since the inception of the various markets but only appeared recently. For example, Regulation NMS is an important rule that was introduced to solve a major problem (ensuring price fairness in a decentralized environment) but it didn't make sense back then. However, given the physical constraints, the problems weren't apparent. Now HFT has highlighted the broken nature of the regulation. The right solution is to force a re-centralization of the exchanges, but instead of that people are pushing to stop HFT.

fleitz 14y ago

Who cares if institutional traders can't figure out why the price is moving. All traders do is arbitrage, computers are much better at spotting arbitrage opportunities than humans are. That institutional traders can't figure it out merely points to their irrelevance. Now, on the other hand what we should be concerned about is if HFT is ruining the investment climate and since companies rarely offer their stock it almost certainly has no effect on the investment climate which looks at the macro conditions across years rather than the microclimate of the next few minutes as traders do. The price of a stock, or the value of an index at any point in time has almost no relevance to the economy as a whole. What matters is that over long periods of time these companies deliver great value to their customers. Lets worry about GS, et al, selling stock that doesn't exist (naked shorting) before we worry about HFT.

raymondh 14y ago

This article is long on inflammatory language and short on analysis or evidence. There are plenty of real issues with HFT as currently practiced (front-running data feeds, gaming with flickering orders, dark pools, etc). However, the article ignores these real issues and suggests that liquidity itself is a bad thing (or something not worth having). Liquidity means having the ability to transfer an asset quickly with minimal loss of value. Anyone who invests wants a liquid market -- illiquid securities are notoriously problematic. The article is misleading. It is the absence of liquidity that is a disaster. Market crashes are what happens when liquidity dries up. Just ask anyone who was trying to sell their house last year. As long as the rules are fair (no front-running, preferential trades, equal access, etc), every market participant adds value. Markets are auctions and auctions run best when there are active bidders.

dchichkov 14y ago
I doubt that HFT traders really engage into frontrunning or market manipulation. It is illegal. Supporting HFT infrastructure R&D is expensive. And takes nontrivial effort. It is simply too risky to engage in illegal activities. Edit: no point -> too risky
- niggler 14y ago
  "There is simply no point engaging into illegal activities." There are many major firms such as SAC capital that built a business around insider trading (which is also illegal). Just yesterday: http://www.businessweek.com/news/2012-10-02/ex-sac-capital-manager-tells-fbi-fund-used-insider-data http://www.businessweek.com/news/2012-10-02/ex-sac-capital-m...
  - dchichkov 14y ago
    Unlike HFT, insider trading doesn't require investment into infrastructure and R&D.
    - s_baby 14y ago

tsotha 14y ago

I don't see the point of worrying about volatility. The price moves and people don't know why. So what? I don't care if traders get heartburn - that's part of the job. The real problem with HFT is its basic unfairness. Firms that aren't physically located near the exchanges are at a disadvantage, as well as individuals located anywhere. I like Glenn Reynolds' idea of adding a randomized delay of up to one second to every trade.

damoncali 14y ago
Volatility is reflected in value, which I suspect you care very much about.
- tsotha 14y ago
  I'm not sure what you mean by that. What I care about is how my asset does over the long run. If it goes up 10% today and down 10% tomorrow, I really don't care.

dave_sullivan 14y ago

Is there really a problem here that's worth regulating? They point out flash crashes as being a big problem--those flash crashes quickly correct themselves back to their "true" value (whatever that means), and the people most hurt are the people who were using bad algorithms and took risks they didn't understand, Knight Capital being a recent example. They reference volume being much higher than it ever has been on account of hft, which is true. But what does that have to do with the bubble of the 90s? Higher volume != stock market ruin. Then there's the small time investor getting hurt. But are they really? The whims of the market now occur because of algorithmic trading as opposed to before, when the whims of the market occurred because of--who knows? Small time investors have been winning and losing since the system was invented. Markets can and always will be fickle. So again, what exactly is the problem here?

YouWontSeeThis 14y ago
The point of the stock market is to invest in companies, not extract value from the public. The benefits of HFT have run their course, now it's simply a tax on the small traders who want to get into the market. What is the benefit?
damoncali 14y ago
Knight almost blinked out of existence due to computers screwing up. Why is it a stretch to think that far worse catastrophes are also likely to happen at some point? The systematic risk is large, and the benefit is near zero.
gergles 14y ago
You have 100 shares of FOO. It is trading at $50. You bought it at $40, so you have a stop-loss order to sell it at $35. Some "liquidity provider"'s algorithm goes haywire and the price drops to $30. The exchange's "circuit breakers" halt trading or revert the trades, and then the price quickly goes back up to $50. Unfortunately for you, your brokerage's computer saw the price drop, executed your stop-loss order, and put your shares up for sale, which were then purchased by another 'liquidity provider' (or hell, maybe even the same one that caused the value to drop in the first place). You've now lost $1500 because of HFT. Your trade can't be reverted, because fuck you, that's why, but the holy "market makers" get their trades rolled back so that their rich friends don't suffer anything for their alogrithmic fail.

tvladeck 14y ago

Want less emphasis on speed? Let tick marks be less than $0.01. Market-makers are clearly willing to provide spreads of less than $0.01. Any time the price of something is artificially moved out of market equilibrium, there will be queueing (either to buy or sell the good). In this case, there is queuing to provide liquidity, and market-makers have every incentive to try and jump the queue. Instead of competing on price (they can't), they compete on speed.

zacharyvoase 14y ago

I'm happy that there seems to be some discontent here on the substance of this article. Indeed, we perceive market 'crashes' to be negative, but in fact they (necessarily) benefit as many people as they hurt. Being able to obtain stock in a company for fewer US$ can be a good thing. And who's to say that banning algorithmic trading will prevent rapid swings in the market? They happened before algorithmic trading was here, and they will happen afterwards. All of this rhetoric seems to be a knee-jerk reaction to something the author is incapable of grokking (no doubt due to a limited human capacity to do so).

krickle 14y ago
HFT crashes do not benefit or hurt anyone, since they are rolled back.
- zacharyvoase 14y ago
  I'm almost certain this statement is incorrect. 1) Just because a price reverts to a previous value does not mean that no-one benefited or was hurt from the fact that it fell or increased in between. 2) The 'rolling back' of an HFT-prompted crash (the causal link being debatable anyway) is not guaranteed at all.

dlauer 14y ago

I would like to say that I was misquoted in this op-ed. I have never said that "high-speed technology was “a destructive force in the market” with “no social benefit.”" I said that there is a limit to the benefit of speed, and we're finding that the latency race to 0 has found that limit.

elfinlike 14y ago
I believe this is the entire quote: "The new electronic marketplace has several structural inefficiencies. These are what have permitted HFT to become a destructive force in the market, rather than a passive liquidity providing mechanism. This should not be construed to say that all HFT is bad, but there are 2 important points to make – the structural inefficiencies present in the market have created a massive misallocation of resources into technology that provides no social benefit, and structural deficiencies in market structure have allowed for nefarious or accidental actions to disrupt the market". I agree there are some contextual problems with the citation in the article. Retrieved from http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=f8a5cef9-291d-4dd3-ad3b-10b55c86d23e&Witness_ID=e514e57c-14e7-4a29-b75d-e5531e6b1cff http://banking.senate.gov/public/index.cfm?FuseAction=Hearin...

aleyan 14y ago

For every trade you will incur some transaction cost. You may think that even though there is a Bid and an Ask price, you may on average get somewhere in the middle, but you don't. Your buy trades are likely to be filled on the Ask price and your sell trades are likely to be filled on the Bid price because some intermediary will get in between and pocket the spread. This has been the case, this is the case, and I haven't seen viable solutions to this what so ever. What has changed over the past decade is who that intermediary is and how much of the spread they can steal. In 2001 New York Stock Exchange reduced the minimum listed price increments from $1/8 to $.01 . This spread used to be collected by exchange "specialists" with inherited seats on the floor for providing liquidity. The rise of alternative exchanges and computers allowed third parties to cut in to provide liquidity with smaller spreads and cutting out the specialists. These third parties are high frequency traders. Investors are still loosing the spread on each trade they make, but it is so much less than it used to be. There are issues with the market microstructures that could be addressed, but trying to push computer generated should not be it. I for one, never want to go back to the dark days of specialists and their $.125 and $.25 spreads. PS. This was a discussion of the minimum transaction cost you can have. Additionally you may have to pay fees to your broker ( especially if you are retail and don't trade a lot ). If you are trading lots of shares at a clip you will also encounter costs from the market impact of your trades.