10 ms·

Make $377,000 trading Apple in one day?

38 points by elleferrer 13y ago

dkhenry 13y ago
I would like to point out this was a theoretical operation done by this professor. It looks to me there are a few errors in his conclusions ( specifically about the risk associated with what he was pretending to do, and the nature of market making ). Also he didn't actually make an algorithm to do the trading and back test it, he just assumed that "with a good algorithm" you could do this. Also the fact that this is represented as a broad threat to the market is just false. This only effects day traders and other HFT's. Yes the long term investor might also be hit by this to the tune of 0.01% per transaction, but the liquidity provided by HFT's almost makes up for that. Make the system better, but do it so that the market functions more efficiently not so that people who aren't you will make less money.
- jellicle 13y ago
  > It looks to me there are a few errors in his conclusions What errors are those? > Also he didn't actually make an algorithm to do the trading and back test it, he just assumed that "with a good algorithm" you could do this. What kind of algorithm do you need? He's able to buy stock at $100 when he already knows that a second later, the stock WILL BE at $101. The risk is zero. The algorithm is a one-liner. > Also the fact that this is represented as a broad threat to the market is just false. This only effects day traders and other HFT's. Not at all. It's a tax on every other participant in the market, on every transaction they make. Every time you buy or sell anything, you make less profit because someone is front-running you.
  - AndrewBissell 13y ago
    > Every time you buy or sell anything, you make less profit because someone is front-running you. The whole front-running charge w.r.t to HFT is such nonsense. When you send a market-taking order to an exchange, there's no way for an HFT trader to see that order before it hits the market and game it. On the other hand, if you want to get cute and work the bid or offer, then yeah, someone who can process and react to the market data feed faster will have an advantage over, say, some overpaid fund manager who's just trying to mimic the S&P 500 and is still getting his data from a Quotron machine.
  - dkhenry 13y ago
    You ( like him ) assume that because he see's something at a given point of time, that he can make decision on it. Yes he might see that there is an offer to sell at one exchange that is below the offer to buy at another exchange, but even if you knew that at some time X you can't place a trade at time X you need at least X + <some finite amount of time to get the trade to the correct market>. In that time lots of stuff can happen. That specific order might be filled or canceled by someone else who knew about it sooner or was quicker to act on it. So what do you do ? Do you wait to buy until you can sell ? What if I am in the same business and I send an order and then cancel it an extremely short period later, before that order could even propigate outside the market I placed it in ? I bet I could get you to buy my stock from me at a good price because you think you can turn it around and fence it really quickly. Guess what you might be taking a haircut on that one. And if I can get you to bite once I am sure I can get a computer to make you do it over and over and over again. This isn't made up people have done it [1] ( and gone to jail for it once they got caught ) 1.http://www.securitiestechnologymonitor.com/news/norwegian-day-traders-arrested-25971-1.html http://www.securitiestechnologymonitor.com/news/norwegian-da...
ISL 13y ago
The economist's preferred trade stoppages don't eliminate the advantage of trading fast, they only reduce it somewhat. If the stoppages are a little out of phase globally, they may actually increase it. When buying and selling stocks on timescales of weeks to years, HFT doesn't effect my strategies nor outcomes in any meaningful way (except to provide exact pricing at the moment I send in a trade).
- pbhjpbhj 13y ago
  Why not have it lock-stepped - every n time units the trades on the table are performed?
  - dkhenry 13y ago
    This is actually how it was done. A few times a day large orders would be matched and executed. We moved away from it, and I am not sure if its still used at any of the exchanges anywhere.
  - gaadd33 13y ago
    You would have to have it synced across all global exchanges, if it wasn't you end up with a similar position that we are in now every n time units.
    - hft_throwaway 13y ago
      Yes and between futures, cash, and options exchanges worldwide. A market structure like this would be much more prone to gaming by sophisticated participants.
    - pbhjpbhj 13y ago
      You wouldn't need it synced except to the unit of the lock-step. Lock it to one trade per hour and you've got an hour's leeway. The deals are arranged and lodged with the exchange. The exchange processes all deals received by the lock time; deals remaining entirely private until that point. You could have one trade per day allowed - that should cut high-frequency trading down somewhat. Of course that's not going to happen because high-frequency and the arms race allows extraction by traders of the maximum value away from producers and towards their own financial cabal.
AndrewBissell 13y ago
"Hendershott walked away with almost $377,000 in theoretical profits by picking off quotes on various exchanges that were fractions of a second out of date." LOL, classic. If I just _pretend_ I get filled on every order, I make a hojillion dollars, see?
- dchichkov 13y ago
  LOL - it was probably a bug in his sim, some future information leak most likely. Getting your timestamps right is always tough.
  - AndrewBissell 13y ago
    Even if you get the timestamps exactly right, predicting whether you actually would have been filled at the exchange on a given simulated order is fraught with error (almost always in the direction of overestimating profits). Anyone who thinks this can be done with simple simulations or "a one-line algo" is speaking from a position of severe ignorance.
    - dchichkov 13y ago
      Simulating the fill rates correctly is tough. But getting the timestamps right is also tough. Exchange timestamps are crap. If these there used - that's a possible future leak right there. Standard PC hardware? Remember, that a standard PC clock gives you something like 50ppm. That means - yes - 50 microseconds per second drift. One need their own boxes with stable clocks, GPS, or otherwise synchronized. I doubt that this professor had access to that kind of infrastructure.
biturd 13y ago
It costs me x dollars to place a trade, how are they getting around a trading fee? Or do not all people have to pay trading fees?
- dkhenry 13y ago
  As I understand it if you never have your trades "cleared" you never incur any cost. When you trade the price to have the trade cleared through a clearing house is built in. When big firms trade they only need to go to the clearing house to square up their books.
  - kolbe 13y ago
    Exchanges charge. HFT firms don't pay a broker, but thy still have to pay exchange fees. Most don't clear themselves, too, so they have a clearing fee. Also, some small FINRA fees. And this is not to mention that the right to be a market maker often costs a lot to begin with.
    - dkhenry 13y ago
      yes but do they have to clear all the trades or just at the end of a session ? I was under the impression that you could pool your holdings and clear them once instead of for each individual trade. Also I thought exchanges charge for access not for activity. So Its a fixed fee to be able to talk to the exchange,but I can send in as many orders as I want.
      - AndrewBissell 13y ago
        Most exchanges now charge on a "maker/taker" basis, where liquidity-taking trades (lifting an offer or hitting a bid) are assessed a fee, while liquidity-providing trades (working a bid or offer which is ultimately filled) are paid a small rebate.
        dkhenry 13y ago
        So that's the exchange side, what about the clearing. As I understand it that's where the bulk of the cost comes from.
jellicle 13y ago
Intervals of a few milliseconds? You could peg prices every few seconds, minutes, or hours. A trading interval of one trading session per hour would be fine. Put in all your offers to buy or sell, trading closes at 10:00:00 and then all the received trades are matched up and executed. Once per hour, once per minute, any interval works fine for the USEFUL purpose of the stock market (allocate capital). It just happens to kill off the non-useful purpose, gambling. While you're at it, tax all stock purchases. All HFT is front-running the market and should be banned.
- redschell 13y ago
  I hope someone can correct me here if I'm wrong, but wasn't this the purpose of the Volcker Rule? Wasn't it designed to put a collar on HFT?
  - bjcohen 13y ago
    No. The primary purpose of Volcker was to stop prop trading at insured banks. Most HFT is done by smaller shops.
- kolbe 13y ago
  Whoever started this theory that HFT would somehow be hurt by periodic auctions must be in the HFT industry. Because disparate auctions just make it more difficult for the myriad exchanges to maintain compliance with Reg NMS, and the fastest market makers will be the ones to make all the money arbing the auctions against one-another.
- deleted 13y ago
  [deleted]
- joshu 13y ago
  Why tax stock purchases? Or is this just anti-rich grumbling? Unfortunately, there are various positive properties of a marketplace that are in tension. In this case, the fairness of price over time and the availability of the market.
- 30thElement 13y ago
kolbe 13y ago
I hear a lot of complaining about the HFT business, and there is plenty to complain about, but I think every so often we need to take a step back and remember what the alternative is: Insular, inefficient, corrupt, pit-based trading. We now complain about a few pennies being scraped off of each order, which stings a little, but read Reminiscences of a Stock Operator to get some context about the dollars that used to be scraped off of each order by pit traders. Today, if you're trading a low dollar stock like Bank of America or Zynga, the vast majority of the money you're giving up to make a trade goes to brokerage, rather than to market makers like Getco. Where computers are involved in trading, there will always be an edge to be gained from writing better, faster programs. We can take some steps to de-emphasize making programs that have a speed advantage (e.g. assign random latencies to all entered orders, or to bring all orders in each stock to trade on a single, specially-designated exchange), but I'll take computers over pit traders any day.
- sengstrom 13y ago
  I don't think it takes hours to take the teeth out of HFT - just put in a delay one order of magnitude above the timescale it is operating on currently should be enough to neuter it.
- sergiosgc 13y ago
  The alternative to HFT is not pit based trading. False premise. The fact that brokerage is too expensive is a straw man in this discussion.
lifeformed 13y ago
How much is he starting with to make that $377k? If I had ten million dollars to play around with, I could easily make that in a day. That figure it meaningless if it's not relative to something. What % return is it?
- dchichkov 13y ago
  He made that $377k in the simulation. Not in the real market.
  - lifeformed 13y ago
    Yeah but how much fake money is he starting with?
  - knowaveragejoe 13y ago
    Yes, though I think what parent is asking is how much simulated capital he started with.
- bjcohen 13y ago
  Paper is here I believe: http://faculty.haas.berkeley.edu/hender/NBBO.pdf http://faculty.haas.berkeley.edu/hender/NBBO.pdf. The 377k number is at the bottom of p. 10. Since he believes there's no capital at risk, the starting amount is unimportant.
  - t0 13y ago
    But if he's making $0.0001 per share and he can only use his capital once every 3 days due to clearing, it is important.
    - bjcohen 13y ago
      I could be wrong, but I don't think that's how settlement works. Making a market would be impractical from a capital perspective for any players. I would assume DTCC nets out its exposure to each clearing member, at the very least.
GoldfishCRM 13y ago
Darn. I thought I was going to make 377 000 dollars a day. That would have been around $94M trading stock. Now I have to work for a living... Instead I got this article about fair game. Whats up with that=)
nraynaud 13y ago
Why don't the pension funds use HFT too if it works better?
- Daniel_Newby 13y ago
  Indirectly, they are. The market price is the average predicted price by all the HFTs. The high-frequency shops are picking up pennies in front of a steamroller so that the rest of us can ignore short term fluctuations in the price. This does not help pension funds all that much. A pension trader might decide to acquire a $1.5B position in some stock that usually trades $250M a day. To avoid being a market mover, large investors take weeks or even months to adjust their positions. HFTs arbitrage between the milliseconds, while retirement funds arbitrage between seasons (to the extent that they arbitrage at all, rather than investing for a share of the profits).
  - hft_throwaway 13y ago
    Also more and more institutional investors are using bank algos that basically act like a one-sided market-making strategy. They can actually crowd out market-making HFTs since they're willing to trade for less edge.
  - nraynaud 13y ago
    part of me thinks they'd better go the traditional bank route and just directly lend the money to companies/people (somehow it's also an active investment). They could tell their customer: "we financed this bridge, we financed this company, we financed this farmer's crop" and when there is a loss, they could explain that the company failed or the bridge could not get off the ground for some reason or the weather was bad for the crop. I don't think the current level of indirection is useful, and I don't think computer shakes the hand of the customer saying "let's build this road".
    - Daniel_Newby 13y ago
      The indirection is useful when exit time rolls around. If you directly finance a bridge in a city that wins a major new factory, you have to figure out how to market and sell your share of their improved taxing ability. If you bought a government bond, you simply issue a sell order priced to account for the lower risk of default.
npad 13y ago
I've been wondering - couldn't you just impose a small delay, say one or two seconds, on each order - forcing everyone to wait a moment to get their order on the order book. Seems like that should eliminate high-frequency trading altogether? Betting exchanges use this idea to prevent people doing time-based arbitrage on live sporting events. For example, to prevent one guy who's watching a match live in the stadium gaining an advantage against someone else watching on TV, where the pictures are delayed a few seconds.
nohuck13 13y ago
Translation from cable-news-speak: Henderschott used paper trading to estimate an upper bound on the amount of money to be made by _all arbitrageurs combined_ trading AAPL on BATS for one day. He assumed perfect execution as an estimation tool and this was not an error. He's not claiming that he would have made $377k, he's estimating the size of the pie. Re: the intermittent auction idea: Having an intermittent auction doesn't take speed out of the picture, but it forces traders to be really fast at the moment before the auction instead of all the time. Lots of exchanges have opening and closing auctions where we can see empirical data. Some exchanges try to solve last-moment problem by having a randomized start time for the auction: you know it will be between, e.g. 3:25 and 3:30, but not exactly when. That said, Henderschott is a really smart guy and I haven't read the paper. I'm curious to see what his suggested solution looks like. I was at a talk he gave a few years ago and someone asked him about this, and I understood that he was against the auction idea for pretty much the standard reasons. I wonder what's changed. Aside, "Latency arbitrage" is an oxymoron. Latency is more or less the defining characteristic of arbitrage. Just because we're using computers instead of carrier pigeons doesn't mean the situation is somehow changed. Saying "latency arbitrage" instead of just "arbitrage" seems like a rhetorical device to paint HFT as something new and dangerous, rather than as a continuation of stuff that has always happened. There are plenty of substantive things to debate about HFT, but using scare words doesn't improve the quality of the debate. Anybody interested in this stuff should read former high-speed trader Chris Stucchio's (yummyfajitas) awesome blog posts and HN discussion. Part 1 here: https://news.ycombinator.com/item?id=3852341 https://news.ycombinator.com/item?id=3852341
GigabyteCoin 13y ago
> playing one stock (Apple (AAPL)), Hendershott walked away with almost $377,000 in theoretical profits OK... I'm waiting for tomorrow's story that states he actually gained $377K in profit trading his own money using that algorithm. Until I read that article, this is all hearsay.

38 points by elleferrer 13y ago

I would like to point out this was a theoretical operation done by this professor. It looks to me there are a few errors in his conclusions ( specifically about the risk associated with what he was pretending to do, and the nature of market making ). Also he didn't actually make an algorithm to do the trading and back test it, he just assumed that "with a good algorithm" you could do this. Also the fact that this is represented as a broad threat to the market is just false. This only effects day traders and other HFT's. Yes the long term investor might also be hit by this to the tune of 0.01% per transaction, but the liquidity provided by HFT's almost makes up for that. Make the system better, but do it so that the market functions more efficiently not so that people who aren't you will make less money.

jellicle 13y ago
> It looks to me there are a few errors in his conclusions What errors are those? > Also he didn't actually make an algorithm to do the trading and back test it, he just assumed that "with a good algorithm" you could do this. What kind of algorithm do you need? He's able to buy stock at $100 when he already knows that a second later, the stock WILL BE at $101. The risk is zero. The algorithm is a one-liner. > Also the fact that this is represented as a broad threat to the market is just false. This only effects day traders and other HFT's. Not at all. It's a tax on every other participant in the market, on every transaction they make. Every time you buy or sell anything, you make less profit because someone is front-running you.
- AndrewBissell 13y ago
  > Every time you buy or sell anything, you make less profit because someone is front-running you. The whole front-running charge w.r.t to HFT is such nonsense. When you send a market-taking order to an exchange, there's no way for an HFT trader to see that order before it hits the market and game it. On the other hand, if you want to get cute and work the bid or offer, then yeah, someone who can process and react to the market data feed faster will have an advantage over, say, some overpaid fund manager who's just trying to mimic the S&P 500 and is still getting his data from a Quotron machine.
- dkhenry 13y ago
  You ( like him ) assume that because he see's something at a given point of time, that he can make decision on it. Yes he might see that there is an offer to sell at one exchange that is below the offer to buy at another exchange, but even if you knew that at some time X you can't place a trade at time X you need at least X + <some finite amount of time to get the trade to the correct market>. In that time lots of stuff can happen. That specific order might be filled or canceled by someone else who knew about it sooner or was quicker to act on it. So what do you do ? Do you wait to buy until you can sell ? What if I am in the same business and I send an order and then cancel it an extremely short period later, before that order could even propigate outside the market I placed it in ? I bet I could get you to buy my stock from me at a good price because you think you can turn it around and fence it really quickly. Guess what you might be taking a haircut on that one. And if I can get you to bite once I am sure I can get a computer to make you do it over and over and over again. This isn't made up people have done it [1] ( and gone to jail for it once they got caught ) 1.http://www.securitiestechnologymonitor.com/news/norwegian-day-traders-arrested-25971-1.html http://www.securitiestechnologymonitor.com/news/norwegian-da...

ISL 13y ago

The economist's preferred trade stoppages don't eliminate the advantage of trading fast, they only reduce it somewhat. If the stoppages are a little out of phase globally, they may actually increase it. When buying and selling stocks on timescales of weeks to years, HFT doesn't effect my strategies nor outcomes in any meaningful way (except to provide exact pricing at the moment I send in a trade).

pbhjpbhj 13y ago
Why not have it lock-stepped - every n time units the trades on the table are performed?
- dkhenry 13y ago
  This is actually how it was done. A few times a day large orders would be matched and executed. We moved away from it, and I am not sure if its still used at any of the exchanges anywhere.
- gaadd33 13y ago
  You would have to have it synced across all global exchanges, if it wasn't you end up with a similar position that we are in now every n time units.
  - hft_throwaway 13y ago
    Yes and between futures, cash, and options exchanges worldwide. A market structure like this would be much more prone to gaming by sophisticated participants.
  - pbhjpbhj 13y ago
    You wouldn't need it synced except to the unit of the lock-step. Lock it to one trade per hour and you've got an hour's leeway. The deals are arranged and lodged with the exchange. The exchange processes all deals received by the lock time; deals remaining entirely private until that point. You could have one trade per day allowed - that should cut high-frequency trading down somewhat. Of course that's not going to happen because high-frequency and the arms race allows extraction by traders of the maximum value away from producers and towards their own financial cabal.

AndrewBissell 13y ago

"Hendershott walked away with almost $377,000 in theoretical profits by picking off quotes on various exchanges that were fractions of a second out of date." LOL, classic. If I just _pretend_ I get filled on every order, I make a hojillion dollars, see?

dchichkov 13y ago
LOL - it was probably a bug in his sim, some future information leak most likely. Getting your timestamps right is always tough.
- AndrewBissell 13y ago
  Even if you get the timestamps exactly right, predicting whether you actually would have been filled at the exchange on a given simulated order is fraught with error (almost always in the direction of overestimating profits). Anyone who thinks this can be done with simple simulations or "a one-line algo" is speaking from a position of severe ignorance.
  - dchichkov 13y ago
    Simulating the fill rates correctly is tough. But getting the timestamps right is also tough. Exchange timestamps are crap. If these there used - that's a possible future leak right there. Standard PC hardware? Remember, that a standard PC clock gives you something like 50ppm. That means - yes - 50 microseconds per second drift. One need their own boxes with stable clocks, GPS, or otherwise synchronized. I doubt that this professor had access to that kind of infrastructure.

biturd 13y ago

It costs me x dollars to place a trade, how are they getting around a trading fee? Or do not all people have to pay trading fees?

dkhenry 13y ago
As I understand it if you never have your trades "cleared" you never incur any cost. When you trade the price to have the trade cleared through a clearing house is built in. When big firms trade they only need to go to the clearing house to square up their books.
- kolbe 13y ago
  Exchanges charge. HFT firms don't pay a broker, but thy still have to pay exchange fees. Most don't clear themselves, too, so they have a clearing fee. Also, some small FINRA fees. And this is not to mention that the right to be a market maker often costs a lot to begin with.
  - dkhenry 13y ago
    yes but do they have to clear all the trades or just at the end of a session ? I was under the impression that you could pool your holdings and clear them once instead of for each individual trade. Also I thought exchanges charge for access not for activity. So Its a fixed fee to be able to talk to the exchange,but I can send in as many orders as I want.
    - AndrewBissell 13y ago
      Most exchanges now charge on a "maker/taker" basis, where liquidity-taking trades (lifting an offer or hitting a bid) are assessed a fee, while liquidity-providing trades (working a bid or offer which is ultimately filled) are paid a small rebate.
      - dkhenry 13y ago
        So that's the exchange side, what about the clearing. As I understand it that's where the bulk of the cost comes from.

jellicle 13y ago

Intervals of a few milliseconds? You could peg prices every few seconds, minutes, or hours. A trading interval of one trading session per hour would be fine. Put in all your offers to buy or sell, trading closes at 10:00:00 and then all the received trades are matched up and executed. Once per hour, once per minute, any interval works fine for the USEFUL purpose of the stock market (allocate capital). It just happens to kill off the non-useful purpose, gambling. While you're at it, tax all stock purchases. All HFT is front-running the market and should be banned.

redschell 13y ago
I hope someone can correct me here if I'm wrong, but wasn't this the purpose of the Volcker Rule? Wasn't it designed to put a collar on HFT?
- bjcohen 13y ago
  No. The primary purpose of Volcker was to stop prop trading at insured banks. Most HFT is done by smaller shops.
kolbe 13y ago
Whoever started this theory that HFT would somehow be hurt by periodic auctions must be in the HFT industry. Because disparate auctions just make it more difficult for the myriad exchanges to maintain compliance with Reg NMS, and the fastest market makers will be the ones to make all the money arbing the auctions against one-another.
deleted 13y ago
[deleted]
joshu 13y ago
Why tax stock purchases? Or is this just anti-rich grumbling? Unfortunately, there are various positive properties of a marketplace that are in tension. In this case, the fairness of price over time and the availability of the market.
30thElement 13y ago

kolbe 13y ago

I hear a lot of complaining about the HFT business, and there is plenty to complain about, but I think every so often we need to take a step back and remember what the alternative is: Insular, inefficient, corrupt, pit-based trading. We now complain about a few pennies being scraped off of each order, which stings a little, but read Reminiscences of a Stock Operator to get some context about the dollars that used to be scraped off of each order by pit traders. Today, if you're trading a low dollar stock like Bank of America or Zynga, the vast majority of the money you're giving up to make a trade goes to brokerage, rather than to market makers like Getco. Where computers are involved in trading, there will always be an edge to be gained from writing better, faster programs. We can take some steps to de-emphasize making programs that have a speed advantage (e.g. assign random latencies to all entered orders, or to bring all orders in each stock to trade on a single, specially-designated exchange), but I'll take computers over pit traders any day.

sengstrom 13y ago
I don't think it takes hours to take the teeth out of HFT - just put in a delay one order of magnitude above the timescale it is operating on currently should be enough to neuter it.
sergiosgc 13y ago
The alternative to HFT is not pit based trading. False premise. The fact that brokerage is too expensive is a straw man in this discussion.

lifeformed 13y ago

How much is he starting with to make that $377k? If I had ten million dollars to play around with, I could easily make that in a day. That figure it meaningless if it's not relative to something. What % return is it?

dchichkov 13y ago
He made that $377k in the simulation. Not in the real market.
- lifeformed 13y ago
  Yeah but how much fake money is he starting with?
- knowaveragejoe 13y ago
  Yes, though I think what parent is asking is how much simulated capital he started with.
bjcohen 13y ago
Paper is here I believe: http://faculty.haas.berkeley.edu/hender/NBBO.pdf http://faculty.haas.berkeley.edu/hender/NBBO.pdf. The 377k number is at the bottom of p. 10. Since he believes there's no capital at risk, the starting amount is unimportant.
- t0 13y ago
  But if he's making $0.0001 per share and he can only use his capital once every 3 days due to clearing, it is important.
  - bjcohen 13y ago
    I could be wrong, but I don't think that's how settlement works. Making a market would be impractical from a capital perspective for any players. I would assume DTCC nets out its exposure to each clearing member, at the very least.

GoldfishCRM 13y ago

Darn. I thought I was going to make 377 000 dollars a day. That would have been around $94M trading stock. Now I have to work for a living... Instead I got this article about fair game. Whats up with that=)

nraynaud 13y ago

Why don't the pension funds use HFT too if it works better?

Daniel_Newby 13y ago
Indirectly, they are. The market price is the average predicted price by all the HFTs. The high-frequency shops are picking up pennies in front of a steamroller so that the rest of us can ignore short term fluctuations in the price. This does not help pension funds all that much. A pension trader might decide to acquire a $1.5B position in some stock that usually trades $250M a day. To avoid being a market mover, large investors take weeks or even months to adjust their positions. HFTs arbitrage between the milliseconds, while retirement funds arbitrage between seasons (to the extent that they arbitrage at all, rather than investing for a share of the profits).
- hft_throwaway 13y ago
  Also more and more institutional investors are using bank algos that basically act like a one-sided market-making strategy. They can actually crowd out market-making HFTs since they're willing to trade for less edge.
- nraynaud 13y ago
  part of me thinks they'd better go the traditional bank route and just directly lend the money to companies/people (somehow it's also an active investment). They could tell their customer: "we financed this bridge, we financed this company, we financed this farmer's crop" and when there is a loss, they could explain that the company failed or the bridge could not get off the ground for some reason or the weather was bad for the crop. I don't think the current level of indirection is useful, and I don't think computer shakes the hand of the customer saying "let's build this road".
  - Daniel_Newby 13y ago
    The indirection is useful when exit time rolls around. If you directly finance a bridge in a city that wins a major new factory, you have to figure out how to market and sell your share of their improved taxing ability. If you bought a government bond, you simply issue a sell order priced to account for the lower risk of default.

npad 13y ago

I've been wondering - couldn't you just impose a small delay, say one or two seconds, on each order - forcing everyone to wait a moment to get their order on the order book. Seems like that should eliminate high-frequency trading altogether? Betting exchanges use this idea to prevent people doing time-based arbitrage on live sporting events. For example, to prevent one guy who's watching a match live in the stadium gaining an advantage against someone else watching on TV, where the pictures are delayed a few seconds.

nohuck13 13y ago

Translation from cable-news-speak: Henderschott used paper trading to estimate an upper bound on the amount of money to be made by _all arbitrageurs combined_ trading AAPL on BATS for one day. He assumed perfect execution as an estimation tool and this was not an error. He's not claiming that he would have made $377k, he's estimating the size of the pie. Re: the intermittent auction idea: Having an intermittent auction doesn't take speed out of the picture, but it forces traders to be really fast at the moment before the auction instead of all the time. Lots of exchanges have opening and closing auctions where we can see empirical data. Some exchanges try to solve last-moment problem by having a randomized start time for the auction: you know it will be between, e.g. 3:25 and 3:30, but not exactly when. That said, Henderschott is a really smart guy and I haven't read the paper. I'm curious to see what his suggested solution looks like. I was at a talk he gave a few years ago and someone asked him about this, and I understood that he was against the auction idea for pretty much the standard reasons. I wonder what's changed. Aside, "Latency arbitrage" is an oxymoron. Latency is more or less the defining characteristic of arbitrage. Just because we're using computers instead of carrier pigeons doesn't mean the situation is somehow changed. Saying "latency arbitrage" instead of just "arbitrage" seems like a rhetorical device to paint HFT as something new and dangerous, rather than as a continuation of stuff that has always happened. There are plenty of substantive things to debate about HFT, but using scare words doesn't improve the quality of the debate. Anybody interested in this stuff should read former high-speed trader Chris Stucchio's (yummyfajitas) awesome blog posts and HN discussion. Part 1 here: https://news.ycombinator.com/item?id=3852341 https://news.ycombinator.com/item?id=3852341

GigabyteCoin 13y ago

> playing one stock (Apple (AAPL)), Hendershott walked away with almost $377,000 in theoretical profits OK... I'm waiting for tomorrow's story that states he actually gained $377K in profit trading his own money using that algorithm. Until I read that article, this is all hearsay.