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The Dangers Of High Frequency Trading... As Predicted By Lawrence H. Summers
When discussing high-frequency trading, Zero Hedge recently asked
"As Goldman is becoming the primary conduit of trading
(whether principal or agency) in virtually all markets, the risk of a
massive liquidity drain becomes exponentially larger, and the risk of
an exogenous event approaches LTCM and Lehman levels. It is this key risk driver that regulators should be focusing on,
instead of chasing and attempting to punish the perpetrators of the
most recent market crash (we are not saying they should not, but they
should prioritize and now should focus on what is
most critical to maintaining a functioning market topology). " It seems we were wrong about authoritarian figures never predicting the implicit risk of this subset of program
trading - ironically, it was well over 20 years ago and none other than
the future Chairman of the Federal Reserve Larry Summers who had some
prophetic words of caution. In a paper titled "Commentary on 'Policies to Curb Stock Market Volatility" in which Larry was discussing the cause and effect of Black Monday (about which he is quite wrong that nobody had seen coming), he lays out some oddly forward looking observations about program trading, or positive-feedback trading as high frequency trading was yet to become a staple market diet.
"In any event, positive-feedback trading is likely to increase volatility substantially. If one wants to design regulatory interventions that will decrease volatility, one must think about measures that will discourage positive-feedback trading rather than negative-feedback trading. Positive-feedback trading is substantially discouraged when traders using that strategy suffer massive losses, which is what one observed after the crash. Everyone who had been pursuing positive-feedback strategies bought more and more as the market went higher and higher, thinking that their portfolio insurance would enable them to get out. They were wrong. It's clear that the crash reduced volatility by reducing the attractiveness of positive-feedback trading."
And some very peculiar observations on margin requirements by Larry, which may have much to do with why it has become so difficult to borrow any heretofore presumed liquid stock:
"More generally, the case for margin requirements raises a question. Instead of asking why the market fell 500 points in one day, it might be more important to know why the market reached 2700 in the first place. Low margin requirements, by encouraging positive feedback trading, may well have encouraged the market increase, setting the stage for the crash."
Could it be that Larry is attempting to negate the positive feedback implications of program trading and other + feedback trading patterns by enacting higher margin requirements? That would be quite a departure, as it would mean that Goldman Sachs is in fact taking advantage of Larry's policies as they impact traditional market mechanisms (the stock loan houses State Street and BoNY in particular), by taking the other side of the positive feedback trade. Consider this in the context of the elimination of market diversity that Zero Hedge discussed in the above referenced article.
A highly insightful paper, definitely worth your read, written by a much younger and much less conflicted Larry Summers (notable phrase: "I conclude that it may be noise rather than news that is driving the market." Zero Hedge agrees wholeheartedly that the N in CNBC stands for noise).
And to conclude, a phenomenal Yale/London School of Economics paper discussing the explicit risk of High Frequency Trading. The authors argue that you can get a liquidity hole due to leveraged short-term traders (e.g., HFTs) driving prices far above what risk-averse long-term investors will buy them at. If the market falls due to an exogenous event, herding behavior, and loss limits, then prices may need to fall a long way until they hit the residual demand curve at which risk-averse long-term value investors will buy. Perhaps Larry should have read this paper when he was considering Black Monday - both the one in 1987 and the upcoming one, compliments of HFT and its #1 purveyor.
Hat Tip Richard
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Thats wonderful
Unrelated to the topic at hand, but I go away to clean my glasses and - what a difference. Nice in so many ways. The powder blue may even have a calming effect.
But - seriously - the change is appreciated - by me anyway.
BTW - obviously for a given login it can be determined that there ARE new comments, but can the new comments themselves be flagged?
Pete
Completely agreed about the color changes, loss of black border (which downsized the apparent space of the page) and getting rids of the comment boxes. I knew this site could pop!
AMZN comes to mind as a stock that needs to fall substantially before rational long term investors would buy shares. My opinion is that AMZN is worth perhaps 25% of it's current share price at most. Disclosure, I'm short AMZN.
i tried for many years shorting amazon, but alas i learned the game is rigged (and even more so for that particular stock). you my friend are right, its overvalued on many many many metrics (its a retailer, PE, growth, etc), but it is manipulated by the funds that own the shares to print a higher and higher closing price all the time. i gave up this fight a long time ago, it cost me dearly
Well with a headline like this it is getting a precarious.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5857074/Fiscal-ruin-of-the-Western-world-beckons.html
It is time for more bonuses on wall street as a thank you from the taxpayer.
isn't it strange how the same names keep coming up as these people continuously are recylced time and time again over the years. its been this way for a long time now. it is time to take out the garbage and burn it.
A real life botanical example is the need to have a diverse gene pool. If the gene pool is not diverse, the ecosystem will spiral into extinction.
Tyler -
You seem to be of two minds about our anti-gravity market.
1) If you are short, you are screwed. Get out of the market right now.
2) HFT, intervention and other schemes and scams are increasing the likelihood and/or severity of a plunge.
Obviously, there are the issues of timelines and probabilities. Both positions can be correct and 0H is immeasurably valuable for those interested in reality-based risk management, thank you.
The shorting impulse is very strong and more than justified in so many instances. We're talking about personal financial survival. Ambivalence? Care to comment?
My whole point is that the market is rigged against the small, medium and many large guys. Trade at your own peril. And I describe why.
of course it is
Would it be fair to summarize your best guess (and I recognize it would have to be just a guess) as to what the future holds for the broad market indexes as they will be stable to higher until some exogenous event causes the whold game to unravel and results in a deep crash?
I can't speak for TD, but if someone says the market is rigged, then a "best guess" is out of the question. The only way a "best guess" is meaningful is if someone has some data to base it on, even if that's merely a gut feeling. [I'm assuming you were asking for more than a "random number generator" answer, but if I'm wrong, the answer was 42.]
If the market is rigged, whether it goes up or down is not based on anything you and I can predict. It is based on whether some person or group of persons get up one morning and decide what they want the market to do.
[And before you interject that it must certainly crash back to reality at some point, keep in mind that if those powers-that-be have the ability to inflate the hell out of the currency behind the market, then they can avoid even a fall back to earth.]
the late bill cooper said.
listen to everyone.
read everything.
demand proof.
TD provides motive, opportunity, and tons of circumstancial evidence. it is good enough.
Seem like Anonymous is sure posting a lot these days, who is this guy?
we are anonymous. we are everywhere. we are legion.
as was stated one time to hal turner is his internet war with 7chan.org
a few years ago.
TYLER,
Chapman foresees a bank holiday lasting 4-5 days. Chapman thinks this first bank holiday presages a much more significant bank holiday months to years later which will involve simultaneous devaluations of multiple currencies as well as other significant changes in the banking system.
http://www.henrymakow.com/perhaps_we_should_prepare_for.html
seen this?
How does simultaneous devaluation of multiple currencies affect anything in macro economics since they are all valued relative to each other ?
The only country that will be holding the bag is China and as indivuduals, us, as I see it if the dollar devalues. May be another round of bonuses to offset the devaluation is due for Wall Street or may be GS just did it by raising renumeration by 33% for each employee.
Tyler, I wanted to make a suggestion about when you post those robot infested bloomberg charts. The nature of the 'action' comes across much more clearly on a tick chart. Dunno if bloomberg has those, but take a look. Last wednesday for example looks crazy, the chart is ruler flat!
Sorry, I meant ruler straight, not flat, obv.
Not sure if you want to combine robots and tick(le)s. Crazy is an understatement.
http://www.youtube.com/watch?v=GYGhmJD9LKc
You are correct, Sir!
Friday, July 17, 2009 Market Plunge Prevention: Friday Lunch Edition Posted by Tyler Durden at 12:16 PM
Rolling buy-ins compliments of our favorite TARP recipients and other are back in full force. If you are short, you are screwed. Get out of the market right now. From a reader: ... ...
....
....
I am referring to the above headline, and the statement, "If you are short...Get out of the market right now.". That is a clear call to cover one's shorts. Presenting the data is fine, but making statements like the above is unnecessary.
The final paragraph in "The Great Crash of 1929" (a book written 54 years ago) sums this is beautifully
"...This is not because the instinct for self preservation on Wall Street is poorly developed. On the contrary, it is probably normal and may be above. But now, as throughout history, financial capacity and political perspicacity are inversely correlated. Long-run salvation by men of business have never been highly regarded if it means disturbance of orderly life and convenience in the present. So inaction will be advocated in the present even though it means deep trouble in the future. Here at least equally with communism lies capitalism. It is what causes men who know that things are going quite wrong to say things are going quite wrong to say things are fundamentally sound."
I just love the name "lizzy". Cute. I wonder if the person is as cute as the name.
Yes and them names short for Lizard.
Extremely happy to see the old slogan is back!!! =)
i tried for many years shorting amazon, but alas i learned the game is rigged (and even more so for that particular stock). you my friend are right, its overvalued on many many many metrics (its a retailer, PE, growth, etc), but it is manipulated by the funds that own the shares to print a higher and higher closing price all the time. i gave up this fight a long time ago, it cost me dearly
--------------------
AmZN is just one of those stocks you just don't short.good articles...http//www.bit.ly/12NCJR
another day....
This site is a fucking joke run by a bunch of conspiracy loving idiots that have never made any real money trading stocks. It's read by another group of pathetic idiots who lose money and can only blame conspiracies for their losses.
High frequency trading benefits the marketplace. It is only possible because the costs of trading are so low now. Did any of you actually trade before the markets were entirely electronic? Do you remember what it was like to deal with asshole specialists that had an informational edge? The same assholes who made billions fleecing the public? The same goes for NASDAQ and the market makers? High frequency boxes do not get any quick peek at incoming order flow like their manual predecessors. Most of them simply front run and are market neutral.
I love the whine about bad liquidity. As if there was this quality liquidity in the way things used to be. Do you think that specialists and market makers were altruistic and were there to catch the falling knife in the past? No. When the market fell, they were always no where to be found. Or they were quoting 100 shares on the bid all the way down. I love this mythical past you idiots dream about where there was this wonderful liquidity when markets were cracking.
Grow up idiots and get a pair!
Got a pair.
But then again I am whacked!
Yo buffoon... Why do they call it High Frequency Trading ? If there is no trading involved, it will be called High Frequency Nothing
WE'RE NOT THE DROIDS YOU'RE LOOKING FOR. WE CAN GO ABOUT OUR BUSINESS.
It will be interesting to see if this "Anonymous" posting option will work. I gotta say that it's annoying to me as a poster, with most people posting as anon. There are advantages and disadvantages of that, I suppose.
Interesting to hear you career traders taken to the woodshed by this voice of experience.
Seems to me that his gratitude for the status quo is very understandable. And what he seems to be saying is that we're spoiled.
How that invalidates the emotional and intellectual climate of this site I do not see, but he seemed to be on a naked run, so I'm letting it go by. Voices of dissent are interesting. And he's certainly entitled to his opinions.
Sometimes citing the curve of history indicates wisdom. In this instance, even "Stop whining, you mediocracies" may be wisdom, but my take on this enterprise is that we have a very long history of market forms and mechanisms, and we've been in the electronic age for a very long time now.
Sure, one should appreciate improvement from the horse and carriage days, but from a modern perspective, that was the VERY old days. How about some MORE progress-some progress of OUR OWN? What are we supposed to do in times like this, just blindly suck it up, put aside our brains and go with the program of being Good Traders? The demands that times like these make requires a larger answer than that for most of us here.
This is how it is now. Web 2.0 . And a whole new narrative. I see no reason whatsoever NOT to expect a lot more today. Legitimately so.
I'm glad we're doing it.
I don't think a critique of HFT implies an outright embrace of the previous system.
As for "This site is a fucking joke run by a bunch of conspiracy loving idiots that have never made any real money trading stocks. It's read by another group of pathetic idiots who lose money and can only blame conspiracies for their losses."
We could rewind a couple of years and your statement would have said real estate instead of stocks - and we see what happened there. The items brought up here are observations begging to be properly addressed and answered and that is all.
I make money trading stocks in this market even though I share many of the questions and concerns raised here. Yes I am a small time noob only making 1-2k/day but until some of these issues are addressed Im having a hard time increasing my position size with any sort of confidence.
This is reminiscent of some research I had done on the crash of 1987. Do you remember the old IBM 287s? Wall Street was using them already to trade their bullish "portfolio insurance" algorithms even back then! It may have been the first time that High Frequency Trading was used to push the market higher. Of course, their rationalization was that they put stop losses so that they just couldn't lose. The other thing some wiseguys did was pile into the options market as a backstop. But no one remembered to backstop the put sellers who had to sell short to cover their own losses. That was one crowd too many headed for the exits at the same time. A repeat of history may be in the making.
WHERE are the protests outside of GOLDMAN, I mean GOVERNMENT SACHS headquarters ?!! Is anyone going to stop blogging and actually make some real noise?? Let's get moving!
Sorry, but the worst Goldman "Conspiracy Theories" will prove to be just the tip of the iceberg. This den of vipers will make Madoff look like Mother Freaking Theresa before its all over.
Tyler, I appreciate you targeting what you see as the current most critical factor, HFT. And it would be good if the SEC focused some preventative medicine there, especially if they really care.
It seems to me that also working the "stale' cases would be of great value in untangling the old deals (hope you weren't making them, man!) associated with alot of the guys currently holding Master of the Universe positions both in government and the industry. If the AG's, FBI and Justice Department would do their jobs, though, that would free up the SEC to do theirs.
Nice to front run the SEC on this one, though. Very nice.
So what should be done with HFT as a "key risk driver"? (It's not a Goldman Sachs exclusive, by the way, because HFT is here to stay no matter what happens to GS).
If NYSE has to halt trading, what happens to HFT and dark pool trading?
They get a rebate.
@#10044
I would have written a very similar post but with less profanity. I hate zerohedge, it's ridiculous. But I do read it, for the entertainment value, so it's being successfully marketed to me in that sense. The scary thing is that people at work have started spamming coworkers with links to this place. And when I say "at work" I mean a firm full of people who should know better.
The challenge is to keep from posting. To respond to most of this is to lose the game,but I can't resist.
Here's to latency front-running, algos, robots doing all the trading, and the supremacy of quants and programmers over traders, salespeople, investors, et al. Matlab, R, Octave, tick databases, fiber optic cables, apple pie.
Liberal arts majors get confused, then eaten by better-prepared market participants. They call this process a conspiracy, and find much agreement with their laments on the internet.
Come over to the dark side. It's cooler in the shade.