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He's arguing that people should be trading based on an assessment of the actual value of the assets behind the stock, rather than the price that other people ar

He's arguing that people should be trading based on an assessment of the actual value of the assets behind the stock, rather than the price that other people are trading the stock at.

tptacek 12y ago
Isn't that like arguing that we shouldn't have markets at all? The primary function of a market is price discovery. If we could all agree on the value of things, today and in the future, things would be a lot simpler.
- lobe 12y ago
  But that price discovery should reveal the price that the underlying security is worth. If shares were only traded based on what other people trade it for, isn't that the blind leading the blind, and the price it is traded for will have little grounding in reality. I have several issues with HFT, however 'spoofing' as it is described sounds like it should be perfectly legal to me. If a player wants to trick the market, it is an irregularity that should be capitalised on by someone with a better understanding of the true value of the security
  - kasey_junk 12y ago
    > But that price discovery should reveal the price that the underlying security is worth. What does that even mean divorced from supply and demand? A share is worth precisely what someone will pay for it. You may think it will be worth more or less later, but right now that is what it is worth. That is the price discovery. I think there is an argument for allowing spoofing, in that it is very hard to enforce. But be clear, spoofing is bad for ALL market participants, not just HFT because it makes the supply/demand calculation more imprecise. This lack of precision leads to less fine grained pricing (in the form of a widened bid/ask spread) which hurts long term investors more than anyone.
  - bd_at_rivenhill 12y ago
    You are ignoring the temporal element of the market; in the short term, prices are set by supply and demand, and trading to match supply and demand is exactly how market makers earn profits. The true value of a security can only be determined over a long period of time, which is why retail investors should pursue a "buy and hold" strategy. This is exactly what Warren Buffet does. The market is an ecology; the behavior of the ants is generally not all that relevant to the lions.

He's arguing that people should be trading based on an assessment of the actual value of the assets behind the stock, rather than the price that other people are trading the stock at.

tptacek 12y ago

Isn't that like arguing that we shouldn't have markets at all? The primary function of a market is price discovery. If we could all agree on the value of things, today and in the future, things would be a lot simpler.

lobe 12y ago
But that price discovery should reveal the price that the underlying security is worth. If shares were only traded based on what other people trade it for, isn't that the blind leading the blind, and the price it is traded for will have little grounding in reality. I have several issues with HFT, however 'spoofing' as it is described sounds like it should be perfectly legal to me. If a player wants to trick the market, it is an irregularity that should be capitalised on by someone with a better understanding of the true value of the security
- kasey_junk 12y ago
  > But that price discovery should reveal the price that the underlying security is worth. What does that even mean divorced from supply and demand? A share is worth precisely what someone will pay for it. You may think it will be worth more or less later, but right now that is what it is worth. That is the price discovery. I think there is an argument for allowing spoofing, in that it is very hard to enforce. But be clear, spoofing is bad for ALL market participants, not just HFT because it makes the supply/demand calculation more imprecise. This lack of precision leads to less fine grained pricing (in the form of a widened bid/ask spread) which hurts long term investors more than anyone.
- bd_at_rivenhill 12y ago
  You are ignoring the temporal element of the market; in the short term, prices are set by supply and demand, and trading to match supply and demand is exactly how market makers earn profits. The true value of a security can only be determined over a long period of time, which is why retail investors should pursue a "buy and hold" strategy. This is exactly what Warren Buffet does. The market is an ecology; the behavior of the ants is generally not all that relevant to the lions.