5 ms·

"Traditional money managers face the increased likelihood of seeing orders "gamed," or deliberately gouged. High-frequency funds have myriad strategies, but man

"Traditional money managers face the increased likelihood of seeing orders "gamed," or deliberately gouged. High-frequency funds have myriad strategies, but many depend on sniffing out "order flow" - or what hedge funds, mutual funds and pension funds that hold stocks for fundamental reasons are buying and selling." In other words, everyone except the insiders get screwed, but the insiders depend on a steady flow of suckers, er I mean aspiring retirees, to skim money from.

stcredzero 17y ago
It's not just everyone but the insiders. It's everyone but the insider insiders.
roc 17y ago
I strongly suspect the correlation between the rise of the Tech and Housing bubbles didn't have nearly so much to do with the rules or the bankers as it did with the enormous influx of 'retirement fund' money that desperately wanted somewhere to go. With so many small-time, long-view investors putting blind trust into the hands of big-time, short-view fund managers/brokers/CEOs, the situation was inevitable. And the only correction that will change things, is retirement money leaving the stock market and becoming a whole lot more skeptical. Plugging regulatory holes doesn't even help; as we've seen, effective regulation just gets stripped away as soon as it's politically feasible.
- jswinghammer 17y ago
  The Austrian theory of the business cycle explains why these bubbles occur. It states that when there is inflation via credit expansion that the sectors that attract that increased credit are in the higher orders or production that are more capital intensive. The inflated prices end up in areas like housing or the stock market. If you stop the inflation then you won't get any more bubbles assuming of course the theory is correct.
  - clistctrl 17y ago
    That is a very interesting theory, it makes a lot of sense.
byrneseyeview 17y ago
Actually, it's pretty tough for an algo fund to make money when Aunt Harriet sells the 100 shares of GE she bought in 1962. The big, dumb mutual funds that turn over their portfolios in a year do get hit by this kind of stuff. On the other hand, algo funds can't make money without 1) making market prices reflect the intentions of traders, rather than just their most recent actions, and 2) making the market more liquid. Both of these add a lot of good to the economy in general, even if they do it at the expense of one class of investors.
- ggruschow 17y ago
  It's especially hard because Aunt Harriet's order almost certainly won't actually make it into the open market. Her broker will very likely "internalize" it (trade against it themselves), or sell it to someone else who will (e.g. Citadel will happily buy their flow.. they bought Ameritrade's last I checked). That very well may be the future of these funds - compete for the customer or pay for order flow like in US Equity Options rather than compete in the open markets. All the orders that can be traded against with any of the typical profitable strategies (most strategies at these places are fairly well known and similar).. won't even make it to the real market. Doing it this way avoids the risks in the open market, notably adverse selection and the need to over-represent your interest in multiple places to increase your execution quality.
  - anigbrowl 17y ago
    Good point. I didn't think of that.

stcredzero 17y ago

It's not just everyone but the insiders. It's everyone but the insider insiders.

roc 17y ago

I strongly suspect the correlation between the rise of the Tech and Housing bubbles didn't have nearly so much to do with the rules or the bankers as it did with the enormous influx of 'retirement fund' money that desperately wanted somewhere to go. With so many small-time, long-view investors putting blind trust into the hands of big-time, short-view fund managers/brokers/CEOs, the situation was inevitable. And the only correction that will change things, is retirement money leaving the stock market and becoming a whole lot more skeptical. Plugging regulatory holes doesn't even help; as we've seen, effective regulation just gets stripped away as soon as it's politically feasible.

jswinghammer 17y ago
The Austrian theory of the business cycle explains why these bubbles occur. It states that when there is inflation via credit expansion that the sectors that attract that increased credit are in the higher orders or production that are more capital intensive. The inflated prices end up in areas like housing or the stock market. If you stop the inflation then you won't get any more bubbles assuming of course the theory is correct.
- clistctrl 17y ago
  That is a very interesting theory, it makes a lot of sense.

byrneseyeview 17y ago

Actually, it's pretty tough for an algo fund to make money when Aunt Harriet sells the 100 shares of GE she bought in 1962. The big, dumb mutual funds that turn over their portfolios in a year do get hit by this kind of stuff. On the other hand, algo funds can't make money without 1) making market prices reflect the intentions of traders, rather than just their most recent actions, and 2) making the market more liquid. Both of these add a lot of good to the economy in general, even if they do it at the expense of one class of investors.

ggruschow 17y ago
It's especially hard because Aunt Harriet's order almost certainly won't actually make it into the open market. Her broker will very likely "internalize" it (trade against it themselves), or sell it to someone else who will (e.g. Citadel will happily buy their flow.. they bought Ameritrade's last I checked). That very well may be the future of these funds - compete for the customer or pay for order flow like in US Equity Options rather than compete in the open markets. All the orders that can be traded against with any of the typical profitable strategies (most strategies at these places are fairly well known and similar).. won't even make it to the real market. Doing it this way avoids the risks in the open market, notably adverse selection and the need to over-represent your interest in multiple places to increase your execution quality.
- anigbrowl 17y ago
  Good point. I didn't think of that.