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HFT people will argue that they provide more liquidity in the market - it's easier to sell your stocks because HF traders increase the overall volume, etc

HFT people will argue that they provide more liquidity in the market - it's easier to sell your stocks because HF traders increase the overall volume, etc. A problem with their argument, (one of many) is that HFTs are not regulated market makers. http://en.wikipedia.org/wiki/Market_maker http://en.wikipedia.org/wiki/Market_maker HFTs provide liquidity when the market's good, but you always have plenty of liquidity when the market's good. You only really need liquidity during a price crash, which is precisely the moment all the HFTs head for the exits, and the exchange seizes up. HFTs are essentially a tax on stock transactions, and if you actually wanted that, why not have a legislative tax, rather than giving 5% to whatever stock trader has the shortest fiber optic cable to the exchange?

rwissmann 13y ago
HFTs are not any more a tax on stock transactions than previous market makers. In many settings they actually do lower transaction costs. Just ask other market participants such as L/S hedge funds, systematic traders, mutual funds etc. In particular, HFTs drove many of the old school manual market makers out of business, or at the very least reduced their margins significantly. The non-populist argument these days seems to be less about fast, electronic market making and more about whether there should be a fixed, minimum trading time, e.g. by discretizing trading into intervals of a certain length.
- tracker1 13y ago
  Any stock trade where the buy vs. sell of a stock is under 3 months is not investment.. In under a day, even more so. It will not be felt by the company in question in any meaningful way, and is simply a newer form of gambling. By taxing any income made from trades where ownership is less than a month at 100% we can create a more honest trading environment, where sane investment becomes a norm. The fact is that would never happen. I'm all for investment.. hell, I'm all for gambling, sex, drugs and rock and roll for that matter. I don't think most things should be illegal... but labeling the stock trade and wall street as investment companies is ludicrous.
  - w_t_payne 13y ago
    For a sensible and mature owner-manager partnership to flourish, investor holding periods need to be aligned with business planning horizons. Many significant projects need between 6 months and 5 years to come to maturity, and holding periods should reflect this pattern (according to the needs and nature of the business). I would argue that investors with a 3 month holding period are actually exerting a pretty corrosive influence on businesses: emphasising a focus on the next quarter's results at all costs.
    - wbl 13y ago
      A company isn't affected by who holds the stock. If I decide that I don't want to hold a stock in a company building a bridge across a river, and sell it to Jack, why does that change the company's desire to finish the bridge?
      - harryh 13y ago
        Because if Jack does't want to build the bridge and he holds enough of the company then he gets to say "stop building the bridge."
        lmm 13y ago
        Is there evidence that's actually what's happening? I hear a lot of complaints on the internet about a quarterly results focus, but I've never heard of shareholders actually telling a company to change tack.
        bertil 13y ago
        There are anecdotal evidence of this regularly happening, but usually those are fair decisions: both strategies discussed are generally sound, if radically opposed. One is generally a cash-out option and is favored by influential raiders who want the cash flow to invest elsewhere; the other is a growth option that might be more about serving management’s ambition that the stakeholders' interest. But those debate are public, rare and not entirely nefast. What I have seen far more often is smart decisions delayed to please the investors, or costly decisions taken, at all stages: before or during Series A, B or further, before or during an IPO, etc. The most common ones are related to HR: contractors costing double and won't be here when what the set up breaks rather than employees to set-up a strategic asset because, otherwise, accounting practices would show increasing long-term duties to said employees. More generally, many companies suffer from a lack of investment because of the short-term focus — this I can describe in details in repeated cases, for the dozen of more companies that I’ve worked with. The single exception was when investors used the product themselves and behaved more like end-users.
dllthomas 13y ago
"[Y]ou always have plenty of liquidity when the market's good." There are a lot of products, especially outside equities, where that's not at all true.
- JasonPunyon 13y ago
  But HFT's don't play much in those products, so they don't provide liquidity or make markets there either.
  - dllthomas 13y ago
    I'm working at an HFT that mostly trades commodities, some of which have awfully thin books.
    - avn2109 13y ago
      And there are plenty of futures markets, commodities and otherwise, with really low volume.
      - dllthomas 13y ago
        Absolutely the case.
panarky 13y ago
Charlie Munger, vice chairman of Berkshire Hathaway, argues that high-frequency trading is "legalized front-running". I think it is very stupid to allow a system to evolve where half the trading is a bunch of short-term people trying to get information one-millionth of a nano-second ahead of somebody else. It’s legalized front-running; I think it’s basically evil and it should never have been able to reach the size that it did ... why should all of us pay a little group of people to engage in legalized front-running of our orders? http://blogs.barrons.com/stockstowatchtoday/2013/05/03/charlie-munger-hft-is-legalized-front-running/ http://blogs.barrons.com/stockstowatchtoday/2013/05/03/charl...
- harryh 13y ago
  Charlie, as a guy who regularly buys and sells large volumes of stock, is just talking his book. It would be great for him if he could make large transactions without the stock price responding quickly to this new information. But it would be bad for everyone he transacted with. To make this concrete: Say Charlie & Warren wake up one day and decide Company X is undervalued and that they want to by 5% of it. They start buying stock. In the old pre HFT days it would take a while for the market to notice all this new demand so they could get a lower price. But now HFTs are really good at noticing this so the price rises faster. But wait you say! This is the "front-running" that Charlie is complaining about and that's bad! He's getting screwed! But what if you were one of the people selling to Charlie. Before HFTs made the price faster you were the one getting screwed! There was all this new demand and you didn't know about it yet so you weren't getting as good of a price as you otherwise could have. HFTs aren't front running. They just move the stock to it's true price faster than the humans doing the job before could.
  - panarky 13y ago
    HFT front-running isn't about faster price discovery. It's about getting quote data in advance of the consolidated feed and executing trades a few microseconds ahead of the order flow. If I'm buying, the HFT buys ahead of me and resells it to me at a higher price. If I'm selling, the HFT shorts ahead of me and buys from me at a lower price. This isn't about liquidity or efficient markets, it's about gaming the system through preferential access to data and executions. It results in higher prices for buyers and lower prices for sellers.
yetanotherphd 13y ago
You can be a de facto market maker without any government regulation. Economically, a market maker is someone who moves the bid and ask closer, so that more people are willing to do transactions. They do this by deducing the true price, and they might do this through fundamental or technical analysis. Providing liquidity in all situations might be useful, but it is an added bonus. If you don't do this, you are still a market maker.
harryh 13y ago
How, precisely, does an HFT tax a stock transaction that I make?
- dredmorbius 13y ago
  By getting in before you on the seller. HFT arbitrages the price differential by means of moving faster than you can. Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01. Rinse, wash, repeat a few million times a day, and those two cents add up. And it's cost you (and the seller) a penny a share each. The numbers are made up here, but that's the principle.
  - gd1 13y ago
    You have no actual idea how a limit order book works do you?
    - deleted 13y ago
      [deleted]
    - dredmorbius 13y ago
      You have no idea how to actually write an informational comment rather than hinting at some received wisdom and greater general understanding without actually revealing any of it, wrapped in condescension which actually lands far of the mark and fails to address the points raised here, do you?
      - gd1 13y ago
        Fine, I'll attempt to parse through your example. "Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01." So, 2 possibilities, you don't say, but you are sending a limit order to buy at $100 or a market (or marketable limit, or fill-and-kill) order to buy at $100. Apparently, you seem to be suggesting that there is a seller in the market, presumably offering at $100. Now, you seem to be suggesting that the HFT sees your order before it hits the matching engine (nonsense) and also that they can somehow re-negotiate with the seller and get him to lower his limit sell to 99.99 (I'm not sure how, do they send goons around to kneecap him if he doesn't? All in the 20 milliseconds your order is on the way to the market?). " and offers you $100.01" ...but let's assume that somehow the magic omnipotent packet-sniffing HFT knows your order is enroute to the exchange, can force market participants to lower their offers, now you're claiming that it can force you to buy at $100.01. Why didn't you send a limit buy at $100, if that's the price you wanted, you saw, and were prepared to pay? >wrapped in condescension If you want to write entire paragraphs about something you know nothing about, you're not really adding to the conversation are you? So you'll open yourself up to a little condescension.

rwissmann 13y ago

HFTs are not any more a tax on stock transactions than previous market makers. In many settings they actually do lower transaction costs. Just ask other market participants such as L/S hedge funds, systematic traders, mutual funds etc. In particular, HFTs drove many of the old school manual market makers out of business, or at the very least reduced their margins significantly. The non-populist argument these days seems to be less about fast, electronic market making and more about whether there should be a fixed, minimum trading time, e.g. by discretizing trading into intervals of a certain length.

tracker1 13y ago
Any stock trade where the buy vs. sell of a stock is under 3 months is not investment.. In under a day, even more so. It will not be felt by the company in question in any meaningful way, and is simply a newer form of gambling. By taxing any income made from trades where ownership is less than a month at 100% we can create a more honest trading environment, where sane investment becomes a norm. The fact is that would never happen. I'm all for investment.. hell, I'm all for gambling, sex, drugs and rock and roll for that matter. I don't think most things should be illegal... but labeling the stock trade and wall street as investment companies is ludicrous.
- w_t_payne 13y ago
  For a sensible and mature owner-manager partnership to flourish, investor holding periods need to be aligned with business planning horizons. Many significant projects need between 6 months and 5 years to come to maturity, and holding periods should reflect this pattern (according to the needs and nature of the business). I would argue that investors with a 3 month holding period are actually exerting a pretty corrosive influence on businesses: emphasising a focus on the next quarter's results at all costs.
  - wbl 13y ago
    A company isn't affected by who holds the stock. If I decide that I don't want to hold a stock in a company building a bridge across a river, and sell it to Jack, why does that change the company's desire to finish the bridge?
    - harryh 13y ago
      Because if Jack does't want to build the bridge and he holds enough of the company then he gets to say "stop building the bridge."
      - lmm 13y ago
        Is there evidence that's actually what's happening? I hear a lot of complaints on the internet about a quarterly results focus, but I've never heard of shareholders actually telling a company to change tack.
        bertil 13y ago
        There are anecdotal evidence of this regularly happening, but usually those are fair decisions: both strategies discussed are generally sound, if radically opposed. One is generally a cash-out option and is favored by influential raiders who want the cash flow to invest elsewhere; the other is a growth option that might be more about serving management’s ambition that the stakeholders' interest. But those debate are public, rare and not entirely nefast. What I have seen far more often is smart decisions delayed to please the investors, or costly decisions taken, at all stages: before or during Series A, B or further, before or during an IPO, etc. The most common ones are related to HR: contractors costing double and won't be here when what the set up breaks rather than employees to set-up a strategic asset because, otherwise, accounting practices would show increasing long-term duties to said employees. More generally, many companies suffer from a lack of investment because of the short-term focus — this I can describe in details in repeated cases, for the dozen of more companies that I’ve worked with. The single exception was when investors used the product themselves and behaved more like end-users.

dllthomas 13y ago

"[Y]ou always have plenty of liquidity when the market's good." There are a lot of products, especially outside equities, where that's not at all true.

JasonPunyon 13y ago
But HFT's don't play much in those products, so they don't provide liquidity or make markets there either.
- dllthomas 13y ago
  I'm working at an HFT that mostly trades commodities, some of which have awfully thin books.
  - avn2109 13y ago
    And there are plenty of futures markets, commodities and otherwise, with really low volume.
    - dllthomas 13y ago
      Absolutely the case.

panarky 13y ago

Charlie Munger, vice chairman of Berkshire Hathaway, argues that high-frequency trading is "legalized front-running". I think it is very stupid to allow a system to evolve where half the trading is a bunch of short-term people trying to get information one-millionth of a nano-second ahead of somebody else. It’s legalized front-running; I think it’s basically evil and it should never have been able to reach the size that it did ... why should all of us pay a little group of people to engage in legalized front-running of our orders? http://blogs.barrons.com/stockstowatchtoday/2013/05/03/charlie-munger-hft-is-legalized-front-running/ http://blogs.barrons.com/stockstowatchtoday/2013/05/03/charl...

harryh 13y ago
Charlie, as a guy who regularly buys and sells large volumes of stock, is just talking his book. It would be great for him if he could make large transactions without the stock price responding quickly to this new information. But it would be bad for everyone he transacted with. To make this concrete: Say Charlie & Warren wake up one day and decide Company X is undervalued and that they want to by 5% of it. They start buying stock. In the old pre HFT days it would take a while for the market to notice all this new demand so they could get a lower price. But now HFTs are really good at noticing this so the price rises faster. But wait you say! This is the "front-running" that Charlie is complaining about and that's bad! He's getting screwed! But what if you were one of the people selling to Charlie. Before HFTs made the price faster you were the one getting screwed! There was all this new demand and you didn't know about it yet so you weren't getting as good of a price as you otherwise could have. HFTs aren't front running. They just move the stock to it's true price faster than the humans doing the job before could.
- panarky 13y ago
  HFT front-running isn't about faster price discovery. It's about getting quote data in advance of the consolidated feed and executing trades a few microseconds ahead of the order flow. If I'm buying, the HFT buys ahead of me and resells it to me at a higher price. If I'm selling, the HFT shorts ahead of me and buys from me at a lower price. This isn't about liquidity or efficient markets, it's about gaming the system through preferential access to data and executions. It results in higher prices for buyers and lower prices for sellers.

yetanotherphd 13y ago

You can be a de facto market maker without any government regulation. Economically, a market maker is someone who moves the bid and ask closer, so that more people are willing to do transactions. They do this by deducing the true price, and they might do this through fundamental or technical analysis. Providing liquidity in all situations might be useful, but it is an added bonus. If you don't do this, you are still a market maker.

harryh 13y ago

How, precisely, does an HFT tax a stock transaction that I make?

dredmorbius 13y ago
By getting in before you on the seller. HFT arbitrages the price differential by means of moving faster than you can. Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01. Rinse, wash, repeat a few million times a day, and those two cents add up. And it's cost you (and the seller) a penny a share each. The numbers are made up here, but that's the principle.
- gd1 13y ago
  You have no actual idea how a limit order book works do you?
  - deleted 13y ago
    [deleted]
  - dredmorbius 13y ago
    You have no idea how to actually write an informational comment rather than hinting at some received wisdom and greater general understanding without actually revealing any of it, wrapped in condescension which actually lands far of the mark and fails to address the points raised here, do you?
    - gd1 13y ago
      Fine, I'll attempt to parse through your example. "Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01." So, 2 possibilities, you don't say, but you are sending a limit order to buy at $100 or a market (or marketable limit, or fill-and-kill) order to buy at $100. Apparently, you seem to be suggesting that there is a seller in the market, presumably offering at $100. Now, you seem to be suggesting that the HFT sees your order before it hits the matching engine (nonsense) and also that they can somehow re-negotiate with the seller and get him to lower his limit sell to 99.99 (I'm not sure how, do they send goons around to kneecap him if he doesn't? All in the 20 milliseconds your order is on the way to the market?). " and offers you $100.01" ...but let's assume that somehow the magic omnipotent packet-sniffing HFT knows your order is enroute to the exchange, can force market participants to lower their offers, now you're claiming that it can force you to buy at $100.01. Why didn't you send a limit buy at $100, if that's the price you wanted, you saw, and were prepared to pay? >wrapped in condescension If you want to write entire paragraphs about something you know nothing about, you're not really adding to the conversation are you? So you'll open yourself up to a little condescension.