6 ms·

If we can't solve this problem, with the rise of machine driven microtrading, is there really any reason to place any faith in the stock market as a private inv

If we can't solve this problem, with the rise of machine driven microtrading, is there really any reason to place any faith in the stock market as a private investor?

kmfrk 14y ago
It's not like it's the only of our concerns: http://www.zerohedge.com/news/2013-01-18/did-tim-geithner-leak-every-fed-announcement-banks http://www.zerohedge.com/news/2013-01-18/did-tim-geithner-le.... I'd love a blog that explained how investing in stocks with all this irregularity can be done consistently well. I imagine it gets harder and harder. Just look at LIBOR.
- homosaur 14y ago
  I agree that corruption is the larger and possibly more pressing issue, but that doesn't seem to be what happened here. I could be wrong of course, but this seems like a technical flaw and not intentional.
  - kmfrk 14y ago
    Oh no. I definitely don't mean to imply that corruption was involved here.
- drawkbox 14y ago
  Small investors can only buy on bad news and long where applicable (i.e good company). Bad news and poor technical performance even if for a period is guaranteed almost to be driven down by HFT. And sometimes HFT over does it (maybe on purpose to let the suckers flood back in). I.e. Apple going to 430, Netflix to mid 50s after similar shorts/run ups and battle of machines. We all will be using HFT soon via proxy or already are. I would say this, possibly in the long run it is better as there will always be HFT algorithms that buy on the dip and take into account technical input as well as human input. Humans are irrational but machines only take a part of that into the algorithm, relying heavily on technicals, futures and news in addition. But there will also be massive shorting efforts as this used to be a tenured skill, but now a machine can match anyone on shorting. Flash crashes are now always possible but also recover quickly. The only way to change this is to charge more for trades and throttles, then there will always be inequality there as well. This also sort of lessens run away bull runs as well as the machines will always pull back first or buy first if past thresholds are met and futures line up.
  - cube13 14y ago
    > Small investors can only buy on bad news and long where applicable (i.e good company). Bad news and poor technical performance even if for a period is guaranteed almost to be driven down by HFT. And sometimes HFT over does it (maybe on purpose to let the suckers flood back in). I.e. Apple going to 430, Netflix to mid 50s after similar shorts/run ups and battle of machines. I think Apple's a weird case. They had a "down" quarter, which caused the tech analysts to go all crazy and claim that Apple's a sell. So that caused people to sell, which drove down the price, and dropping below 500 probably triggered a lot of people's stop loss strategies, which drove down the price even more...
    - lmm 14y ago
      That's not a weird case, that's fairly classic (though utterly irrational) market behaviour.
      - MrMan 14y ago
        apple will go lower in the next 12 months, and it has nothing to do with HFT
vannevar 14y ago
We could significantly alleviate the problem by limiting by law the trading frequency. Traders ultimately depend on the law to recognize the validity of their transactions. There is no value to society in high frequency trading. Mandating a full second in a market that operated quite well when slow-reacting humans conducted all the transactions should be more than sufficient.
- jrockway 14y ago
  Will laws work? I imagine the big investment banks will just set up dark pools in countries with favorable laws and just trade there instead. Added benefit: no more taxes! The solution is to realize that high-frequency traders are playing a different game than you, even though they're on the same playing field. They do weird things but it's probably not hurting your returns. (It wasn't HFT that imploded the big banks, Enron, and Worldcom, right?)
  - vannevar 14y ago
    They do weird things but it's probably not hurting your returns. I'm not so sure. The financial system is a nonlinear dynamical system. The hallmark of such systems is that small local perturbations can lead to very large changes in system-wide state. High-frequency trading vastly increases the number of small perturbations, and while most remain local, there is a finite probability that some will percolate upward in scale. So micro-scale trading may increase our exposure to catastrophe.
    - MrMan 14y ago
      i think that is nonsense.
  - bjourne 14y ago
    Does money just grow on trees in the magic stock market? The amount of sustained non-bubble growth the stock market can generate is limited, not unbounded. It follows that if the HFT bots steals a slice of it, then the slice the regular gamblers get is smaller than it would otherwise have been.
jrockway 14y ago
This was futures, not stocks, but I see where you're going. Market makers aren't competing with buy-and-hold investors. Price fluctuations like this don't affect people that are investing in the fundamental performance of the underlying company. The price may swing by a few percent randomly in either direction, but in the long run, a growing company will have a growing stock price. Equities make up much of my portfolio and I haven't been disappointed. As cynical as everyone is about how "big companies suck", they have historically done a pretty good job creating value. And I think that will continue for some time.
- pbhjpbhj 14y ago
  >As cynical as everyone is about how "big companies suck", they have historically done a pretty good job creating value. And I think that will continue for some time. // It's not like resources can run out or anything. You just dig up more.
  - jrockway 14y ago
    But you can make processes more efficient and add more value with less human interaction. Consider Amazon vs. your local mom and pop grocery.
    - pbhjpbhj 14y ago
      >add more value with less human interaction // This sounds like an oxymoron. Financial efficiency and value often appear to be at odds. Amazon certainly appear to spend less resources in the delivery of goods. Low cost of acquisition isn't necessarily correlated with greater value in terms of human fulfilment. I've often wondered why we don't have [more/widespread] community kitchens, less work needed for food production, reduced waste and transportation costs, etc.. Why can't I go somewhere and get a quality, healthy meal that is cheaper than what I can make at home.
      - jrockway 14y ago
        Assuming you're an engineer, it is probably not cheaper for you to cook at home if you factor in the cost of your own time. As soon as you involve a bunch of people that have no connection to each other and ask them to start doing work, they start wanting money. Hence, no community kitchens of software engineers: they can make a lot more money programming than by cooking you your food.
svachalek 14y ago
You have to realize the distinction between trading and investing. Investing is putting money into something in the belief that over the long term, it will likely return enough money to be worth the opportunity cost and the risks involved. Trading is seeing a price difference between here and there (in 4 dimensional coordinates) and making money by moving the goods. The stock market was created for investors, who by investing grow the economy as a whole, but it has been taken over by traders, who are helpful for greasing the wheels of the exchange but ultimately not necessary in anything like today's numbers. It would seem by competition for a commodity service they should start killing each other off but so far it seems there are still enough amateurs in the game to keep them well-fed. So in short, make sure what you are doing is investing and not trading. Investing still pays off. Trading is like jumping into a tank full of robotic sharks.
- fennecfoxen 14y ago
  This. I mean, consider: a report got released 400ms early. So the price of the futures fell 400ms early, and some trading firm made money off of that fall (instead of some other trading firm making said money.) What's the impact on you of the price changing 400ms early? Even if you held that asset, were you really planning your trades to the second, let alone the millisecond, to begin with? No? Then it doesn't matter. Buy-and-hold broad index funds for decades on end, then you need only fear macroeconomics and political risk.
cube13 14y ago
Trading stock is, and pretty much always has been, gambling. So your strategy should be the same as blackjack: Know the rules and know your limits. For the market, you should also be in for the long term, and always use limit orders. Limit orders make sure that your buy or sell order are done exactly at what you want. Legally, the trade cannot execute unless it's at or below your limit if you're buying, or at or above if you're selling. That, more than anything else, protects you from small time fluctuations caused by HFT. Going for the long term is really where the focus should be, though. HFT algos tend to fight cents or fractions of a cent(the event referenced here caused a 2% drop in the futures price, which came out to around 6 cents per : http://quotes.ino.com/charting/index.html?s=NYMEX_NG.H13.E&t=&a=&w=&v=s http://quotes.ino.com/charting/index.html?s=NYMEX_NG.H13.E&#... ). As a private investor, your focus shouldn't be on getting rich in a week. It should be making sure that the pile of money you have now gets bigger every year. Your limits shouldn't be the HFT-like fractions of a cent or tiny percentages, they should be in the 5-10% range for a return. Also, since you're not going to win fighting HFT, don't bother. What they do shouldn't effect your overall strategy, because you're not in that space.

If we can't solve this problem, with the rise of machine driven microtrading, is there really any reason to place any faith in the stock market as a private investor?

kmfrk 14y ago

It's not like it's the only of our concerns: http://www.zerohedge.com/news/2013-01-18/did-tim-geithner-leak-every-fed-announcement-banks http://www.zerohedge.com/news/2013-01-18/did-tim-geithner-le.... I'd love a blog that explained how investing in stocks with all this irregularity can be done consistently well. I imagine it gets harder and harder. Just look at LIBOR.

homosaur 14y ago
I agree that corruption is the larger and possibly more pressing issue, but that doesn't seem to be what happened here. I could be wrong of course, but this seems like a technical flaw and not intentional.
- kmfrk 14y ago
  Oh no. I definitely don't mean to imply that corruption was involved here.
drawkbox 14y ago
Small investors can only buy on bad news and long where applicable (i.e good company). Bad news and poor technical performance even if for a period is guaranteed almost to be driven down by HFT. And sometimes HFT over does it (maybe on purpose to let the suckers flood back in). I.e. Apple going to 430, Netflix to mid 50s after similar shorts/run ups and battle of machines. We all will be using HFT soon via proxy or already are. I would say this, possibly in the long run it is better as there will always be HFT algorithms that buy on the dip and take into account technical input as well as human input. Humans are irrational but machines only take a part of that into the algorithm, relying heavily on technicals, futures and news in addition. But there will also be massive shorting efforts as this used to be a tenured skill, but now a machine can match anyone on shorting. Flash crashes are now always possible but also recover quickly. The only way to change this is to charge more for trades and throttles, then there will always be inequality there as well. This also sort of lessens run away bull runs as well as the machines will always pull back first or buy first if past thresholds are met and futures line up.
- cube13 14y ago
  > Small investors can only buy on bad news and long where applicable (i.e good company). Bad news and poor technical performance even if for a period is guaranteed almost to be driven down by HFT. And sometimes HFT over does it (maybe on purpose to let the suckers flood back in). I.e. Apple going to 430, Netflix to mid 50s after similar shorts/run ups and battle of machines. I think Apple's a weird case. They had a "down" quarter, which caused the tech analysts to go all crazy and claim that Apple's a sell. So that caused people to sell, which drove down the price, and dropping below 500 probably triggered a lot of people's stop loss strategies, which drove down the price even more...
  - lmm 14y ago
    That's not a weird case, that's fairly classic (though utterly irrational) market behaviour.
    - MrMan 14y ago
      apple will go lower in the next 12 months, and it has nothing to do with HFT

vannevar 14y ago

We could significantly alleviate the problem by limiting by law the trading frequency. Traders ultimately depend on the law to recognize the validity of their transactions. There is no value to society in high frequency trading. Mandating a full second in a market that operated quite well when slow-reacting humans conducted all the transactions should be more than sufficient.

jrockway 14y ago
Will laws work? I imagine the big investment banks will just set up dark pools in countries with favorable laws and just trade there instead. Added benefit: no more taxes! The solution is to realize that high-frequency traders are playing a different game than you, even though they're on the same playing field. They do weird things but it's probably not hurting your returns. (It wasn't HFT that imploded the big banks, Enron, and Worldcom, right?)
- vannevar 14y ago
  They do weird things but it's probably not hurting your returns. I'm not so sure. The financial system is a nonlinear dynamical system. The hallmark of such systems is that small local perturbations can lead to very large changes in system-wide state. High-frequency trading vastly increases the number of small perturbations, and while most remain local, there is a finite probability that some will percolate upward in scale. So micro-scale trading may increase our exposure to catastrophe.
  - MrMan 14y ago
    i think that is nonsense.
- bjourne 14y ago
  Does money just grow on trees in the magic stock market? The amount of sustained non-bubble growth the stock market can generate is limited, not unbounded. It follows that if the HFT bots steals a slice of it, then the slice the regular gamblers get is smaller than it would otherwise have been.

jrockway 14y ago

This was futures, not stocks, but I see where you're going. Market makers aren't competing with buy-and-hold investors. Price fluctuations like this don't affect people that are investing in the fundamental performance of the underlying company. The price may swing by a few percent randomly in either direction, but in the long run, a growing company will have a growing stock price. Equities make up much of my portfolio and I haven't been disappointed. As cynical as everyone is about how "big companies suck", they have historically done a pretty good job creating value. And I think that will continue for some time.

pbhjpbhj 14y ago
>As cynical as everyone is about how "big companies suck", they have historically done a pretty good job creating value. And I think that will continue for some time. // It's not like resources can run out or anything. You just dig up more.
- jrockway 14y ago
  But you can make processes more efficient and add more value with less human interaction. Consider Amazon vs. your local mom and pop grocery.
  - pbhjpbhj 14y ago
    >add more value with less human interaction // This sounds like an oxymoron. Financial efficiency and value often appear to be at odds. Amazon certainly appear to spend less resources in the delivery of goods. Low cost of acquisition isn't necessarily correlated with greater value in terms of human fulfilment. I've often wondered why we don't have [more/widespread] community kitchens, less work needed for food production, reduced waste and transportation costs, etc.. Why can't I go somewhere and get a quality, healthy meal that is cheaper than what I can make at home.
    - jrockway 14y ago
      Assuming you're an engineer, it is probably not cheaper for you to cook at home if you factor in the cost of your own time. As soon as you involve a bunch of people that have no connection to each other and ask them to start doing work, they start wanting money. Hence, no community kitchens of software engineers: they can make a lot more money programming than by cooking you your food.

svachalek 14y ago

You have to realize the distinction between trading and investing. Investing is putting money into something in the belief that over the long term, it will likely return enough money to be worth the opportunity cost and the risks involved. Trading is seeing a price difference between here and there (in 4 dimensional coordinates) and making money by moving the goods. The stock market was created for investors, who by investing grow the economy as a whole, but it has been taken over by traders, who are helpful for greasing the wheels of the exchange but ultimately not necessary in anything like today's numbers. It would seem by competition for a commodity service they should start killing each other off but so far it seems there are still enough amateurs in the game to keep them well-fed. So in short, make sure what you are doing is investing and not trading. Investing still pays off. Trading is like jumping into a tank full of robotic sharks.

fennecfoxen 14y ago
This. I mean, consider: a report got released 400ms early. So the price of the futures fell 400ms early, and some trading firm made money off of that fall (instead of some other trading firm making said money.) What's the impact on you of the price changing 400ms early? Even if you held that asset, were you really planning your trades to the second, let alone the millisecond, to begin with? No? Then it doesn't matter. Buy-and-hold broad index funds for decades on end, then you need only fear macroeconomics and political risk.

cube13 14y ago

Trading stock is, and pretty much always has been, gambling. So your strategy should be the same as blackjack: Know the rules and know your limits. For the market, you should also be in for the long term, and always use limit orders. Limit orders make sure that your buy or sell order are done exactly at what you want. Legally, the trade cannot execute unless it's at or below your limit if you're buying, or at or above if you're selling. That, more than anything else, protects you from small time fluctuations caused by HFT. Going for the long term is really where the focus should be, though. HFT algos tend to fight cents or fractions of a cent(the event referenced here caused a 2% drop in the futures price, which came out to around 6 cents per : http://quotes.ino.com/charting/index.html?s=NYMEX_NG.H13.E&t=&a=&w=&v=s http://quotes.ino.com/charting/index.html?s=NYMEX_NG.H13.E&#... ). As a private investor, your focus shouldn't be on getting rich in a week. It should be making sure that the pile of money you have now gets bigger every year. Your limits shouldn't be the HFT-like fractions of a cent or tiny percentages, they should be in the 5-10% range for a return. Also, since you're not going to win fighting HFT, don't bother. What they do shouldn't effect your overall strategy, because you're not in that space.