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If we eventually decide that all of this ridiculously fast bid/offer blitzing by our HFT overlords is a destabilization risk to the economy [1], couldn't we sta

by pak 13y ago

If we eventually decide that all of this ridiculously fast bid/offer blitzing by our HFT overlords is a destabilization risk to the economy [1], couldn't we start taxing these transactions, or the bids/offers themselves? This level of high-frequency noise being thrown into the market can't reasonably go on increasing forever, right... at some point we just bury ourselves in a never-ending war of inscrutable, difficult to predict machine trading algorithms, and nobody will be able to translate market movements into anything linkable to reality, right [2]? Shouldn't either market operators or the government at some point in the future start dialing back the traffic with penalties on the sheer number of actions taken? ... or is that just an insane non-starter, since it affects too many rich people in the finance sector and their colleagues rotating through the current regulatory structure? I think it's an interesting long-term problem faced by society to decide whether we are OK with investment markets becoming completely impossible for "normal", human investors to navigate. It's already rapidly going that way--the capability to profit is already wildly tilted toward firms that act at HFT volume. If a poker site became overrun by bots to the extent that it was no longer fun for humans to play, they would fight back against the bots (as most do to some degree). But with investments... we may be getting to the point where the average day trader needs a 3000U server farm to compete effectively, and then I question whether we've lost sight of why we subsidize and spend money regulating that market at all. It's like a chess league where the grandmasters get to use computers as aids, and the newcomers have to play blindfolded. [1] Nothing catastrophic has happened yet, but there have been a few flash crashes that have necessitated trading to be shut down, and having to "roll back" trades is never perfectly equitable and only decreases confidence in a market. [2] Some of those flash crashes were traced back to one overzealous seller that threw HFT's for a loop (read http://en.wikipedia.org/wiki/2010_Flash_Crash http://en.wikipedia.org/wiki/2010_Flash_Crash -- it is quite interesting). I shudder to think of a day when the market fluctuates wildly and the data is literally too complicated for regulators to trace it back to any identifiable cause. That day is closer than anybody in finance is likely to acknowledge.

twoodfin 13y ago
What's stopping you from making lots of money by successfully predicting next year's stock price for Apple, IBM or Ford? Normal human investors can obviously keep doing normal human investment.
- josh2600 13y ago
  Whoosh.
  - aeturnum 13y ago
    That was a not very helpful response to a fairly obvious question. HFT is taking advantage of arbitrage over a very short period of time (seconds). What effect does it have on long-term prices? If you hold stock for longer than 0.01 seconds (or 1-2 days in the case of a fat-fingered-algorithm), why should you care?
    - josh2600 13y ago
      That wasn't my point. Countering HFT with "well you can still pick stocks the old-fashioned way!" is borderline moronic. Over 95% of trade volume is HFT; retail investors can't compete. I think HFT is ridiculous and the epitome of capitalism. If you outlaw'd it, a new form of lightning fast arbitrage would arrive. My point was that if you call apple increasing over the course of 1 year, you might double your money if you're lucky. It's much more likely that the HFT operators will outperform you, as they have over the past decade.
      - twoodfin 13y ago
        Over 95% of trade volume is HFT; retail investors can't compete. Why do they need to? Winning isn't getting more trades in, winning is making money! According to the Times[1], HFT firms' profit topped out at less than $5B in 2009. That is, not to put too fine a point on it, peanuts. [1] http://www.nytimes.com/2012/10/15/business/with-profits-dropping-high-speed-trading-cools-down.html http://www.nytimes.com/2012/10/15/business/with-profits-drop...
      - aeturnum 13y ago
        >My point was that if you call apple increasing over the course of 1 year, you might double your money if you're lucky. It's much more likely that the HFT operators will outperform you, as they have over the past decade. These results don't seem related at all. You buy stock at price A and sell and price B (B = A+X, hopefully). What does it matter to you that other parties made money (perhaps more than X) while the stock was going to B? Institutional investors have always been more savvy about the market than retail ones. I don't see how them making money around the edges changes the calculus for "the rest of us."
dchichkov 13y ago
> we may be getting to the point where the average day trader needs a 3000U server farm to compete effectively Yes. That's actually a bit of a problem. It is perfectly all right that day traders are being out-competed by HFT firms, by itself that's fine. Humans replaced by computer, nothing bad about that. What is not good, is that a successful entry into arbitrage market nowadays require a lot of infrastructure and technical skills. That increased barrier reduces a number of players on the market. That reduces diversity. And that increases risk. That's bad. A simple example how that increases risk. Imagine that a single HFT firm had managed to out-compete all others. And now owns perfect infrastructure with nanosecond level latencies, speed-of-light channels between the exchanges and trading algos without any bugs and teams of quants maintaining them. Obviously no day trader will be able to compete with teams of PhDs. And no new newcomer HFT firm will be able to compete. But as a result diversity of day traders will have decreased to exactly one. And any glitch in the operation of that firm (sorry, a box that was trading SPY just crashed) will be creating flash-crash artifacts without easy resolutions to them. So yes, an increased entry barrier into day trading is bit of a problem.
- kasey_junk 13y ago
  The cost of entry into the markets has gone down not gone up. It is orders of magnitude cheaper to set up an electronic trading operation than it was to be on the floor. Further, successful entry into arbitrage markets always required specialist infrastructure and skills. They used to be good old boy networks, brightly colored vests, and arcane hand signals. Now it is programming and networking. In the previous world there was not "NASA" effect at all. Now at least the skills can be transfered to other industries.
rayiner 13y ago
On the flip side, maybe in the future computers take the money out of the finance industry. As things become automated, the function Wall Street provides, allocating capital, should in theory become cheaper relative to the rest of the economy. Say one day maybe computers will replace VC's: instead of pitching, you plug your information into a web page and get an answer as to whether you're getting funded.
harryh 13y ago
> couldn't we start taxing these transactions, or the bids/offers themselves? Yes, but that tax would just be passed on to "regular investors" in the form of higher spreads. Market makers are providing a real service. That service has a cost. FWIW, that cost is now much smaller than it used to be due to the fact that computers are doing it now instead of real humans. Automation FTW!

by pak 13y ago

twoodfin 13y ago

What's stopping you from making lots of money by successfully predicting next year's stock price for Apple, IBM or Ford? Normal human investors can obviously keep doing normal human investment.

josh2600 13y ago
Whoosh.
- aeturnum 13y ago
  That was a not very helpful response to a fairly obvious question. HFT is taking advantage of arbitrage over a very short period of time (seconds). What effect does it have on long-term prices? If you hold stock for longer than 0.01 seconds (or 1-2 days in the case of a fat-fingered-algorithm), why should you care?
  - josh2600 13y ago
    That wasn't my point. Countering HFT with "well you can still pick stocks the old-fashioned way!" is borderline moronic. Over 95% of trade volume is HFT; retail investors can't compete. I think HFT is ridiculous and the epitome of capitalism. If you outlaw'd it, a new form of lightning fast arbitrage would arrive. My point was that if you call apple increasing over the course of 1 year, you might double your money if you're lucky. It's much more likely that the HFT operators will outperform you, as they have over the past decade.
    - twoodfin 13y ago
      Over 95% of trade volume is HFT; retail investors can't compete. Why do they need to? Winning isn't getting more trades in, winning is making money! According to the Times[1], HFT firms' profit topped out at less than $5B in 2009. That is, not to put too fine a point on it, peanuts. [1] http://www.nytimes.com/2012/10/15/business/with-profits-dropping-high-speed-trading-cools-down.html http://www.nytimes.com/2012/10/15/business/with-profits-drop...
    - aeturnum 13y ago
      >My point was that if you call apple increasing over the course of 1 year, you might double your money if you're lucky. It's much more likely that the HFT operators will outperform you, as they have over the past decade. These results don't seem related at all. You buy stock at price A and sell and price B (B = A+X, hopefully). What does it matter to you that other parties made money (perhaps more than X) while the stock was going to B? Institutional investors have always been more savvy about the market than retail ones. I don't see how them making money around the edges changes the calculus for "the rest of us."

dchichkov 13y ago

> we may be getting to the point where the average day trader needs a 3000U server farm to compete effectively Yes. That's actually a bit of a problem. It is perfectly all right that day traders are being out-competed by HFT firms, by itself that's fine. Humans replaced by computer, nothing bad about that. What is not good, is that a successful entry into arbitrage market nowadays require a lot of infrastructure and technical skills. That increased barrier reduces a number of players on the market. That reduces diversity. And that increases risk. That's bad. A simple example how that increases risk. Imagine that a single HFT firm had managed to out-compete all others. And now owns perfect infrastructure with nanosecond level latencies, speed-of-light channels between the exchanges and trading algos without any bugs and teams of quants maintaining them. Obviously no day trader will be able to compete with teams of PhDs. And no new newcomer HFT firm will be able to compete. But as a result diversity of day traders will have decreased to exactly one. And any glitch in the operation of that firm (sorry, a box that was trading SPY just crashed) will be creating flash-crash artifacts without easy resolutions to them. So yes, an increased entry barrier into day trading is bit of a problem.

kasey_junk 13y ago
The cost of entry into the markets has gone down not gone up. It is orders of magnitude cheaper to set up an electronic trading operation than it was to be on the floor. Further, successful entry into arbitrage markets always required specialist infrastructure and skills. They used to be good old boy networks, brightly colored vests, and arcane hand signals. Now it is programming and networking. In the previous world there was not "NASA" effect at all. Now at least the skills can be transfered to other industries.

rayiner 13y ago

On the flip side, maybe in the future computers take the money out of the finance industry. As things become automated, the function Wall Street provides, allocating capital, should in theory become cheaper relative to the rest of the economy. Say one day maybe computers will replace VC's: instead of pitching, you plug your information into a web page and get an answer as to whether you're getting funded.

harryh 13y ago

> couldn't we start taxing these transactions, or the bids/offers themselves? Yes, but that tax would just be passed on to "regular investors" in the form of higher spreads. Market makers are providing a real service. That service has a cost. FWIW, that cost is now much smaller than it used to be due to the fact that computers are doing it now instead of real humans. Automation FTW!