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The High Frequency Trading Debate Gets Down And Dirty
A major piece by Paul Farrell of MarketWatch "HFT-Quants beat Lazy Portfolios in the 'Singularity'" blasts virtually all aspects associated with HFT, contrary to Goldman Sachs' most recent vocal defense on the topic (more on that later). From Paul's piece:
No wonder "too-stupid-to-fail" banks prefer gambling with HFT-Quants
over helping small commercial banking customers. This is their cash cow
generating future earnings: As Forbes recently put it in "The New
Masters of Wall Street" "... even as financial markets collapsed last
year, high-frequency traders collectively enjoyed $21 billion in gross
profit" while "some high-frequency traders are sending out 1,000 orders
a second."
And Farrell points out the dramatic divergence that has occurred under everyone's noses over the past five years, in which HFT (ab)users now enjoy a "heads we win, tails we win" market monopoly, while retail is stuck with the opposite trade.
Worse yet, if America's 95 million individual investors do try to play
this new game against these HFT-Quants, they will lose big.
In the Forbes piece Liz Moyer and Emily Lambert warn: "One
eyebrow-raising reality is that a big chunk of high-frequency profits
derive from jumping into markets before small investors can -- in the
high-frequency world, the 20 milliseconds it can take quotes to travel
from Chicago to Nasdaq's market site in New Jersey." The HFT-Quants are
always way ahead of you, skimming your money.
The inordinately profitable role of HFT, as many have pointed out, is simply too big to ignore:
Last year Wall Street banks were virtually insolvent. Taxpayers
stimulated them back from the dead. Now, thanks to the proliferation of
HFT-Quants, Wall Street's again racing at hyperspeed, gambling with the
money it conned from taxpayers, using it to skim more from clueless
investors. First the Fed and Treasury, now Wall Street's
"Too-Stupid-To-Fail" banks are stealing from Main Street's
"Too-Dumb-To-Stop-Trading" investors.
Farrell, in borrowing a term penned by visionary Ray Kurzweil, has coined the definition of a "Singularity" to explain where in the technological continuum the various subtechnologies that make up what is known as high frequency trading, belong:
Forget 2045. Reality's now moving at warp speed thanks to the new
HFT-Quants. The "Singularity" is not "near" ... it is here ... it is
now ... it is today. And in this new "Singularity" the HFT-Quants no
longer trade as they did in the old stock exchanges even a few years
ago. They're light-years beyond not just Main Street, but also
Congress, the SEC and Fed. In the immortal words of Star Trek's Captain
Kirk, they've "gone where no man has gone before."
HFT-Quants virtually created this "Singularity" where computers exceed
human intelligence, where the quants' superpowered math algorithms far
exceed the primitive human intelligence of the average Main Street
investors. And where Main Street investors are called "irrationals" by
behavioral economists, and gamblers and con men call us "a mark."
Forbes bluntly put it this way in a sidebar: "Trading for Dummies" "The
role of sucker on Wall Street has traditionally been played by retail
investors." That's you.
Stop Day-Trading: that is the simple solution to prevent the HFT monopoly from skimming hundreds of millions, if not much more, of pennies daily from naive retail investors who join the herd every day as per CNBC's admonishments that if you leave your money in your bank account you will be broke and presumably branded a traitor.
Forbes offered some sound advice: "If every penny counts for you,
there are still ways to avoid being the dumb money in a trade." The
usual tips: Streaming quotes, limit orders and "pay attention to
premarket action."
But in their fourth "Trading for Dummies" tip they really show their
cards, telling Main Street investors something we've been preaching for
years: "Don't day-trade: It's a losing game to try to make money
chasing momentary market inefficiencies. Too many pros with too much
computing power are already at it. Instead, decide on a set of
long-term investing goals and trade infrequently to achieve them."
And more:
Get it? Never trade. It is a loser's game. Remember that famous
research studies by two University of California finance professors,
Terry Odean and Brad Barber. Their bottom line: "The more you trade,
the less you earn." Why? Transaction costs, taxes and bad decisions
always kill returns. Today, you must add a fourth element to this
loser's equation, an unbeatable opponent, the HFT-Quants.
Unfortunately, Main Street's full of suckers, as a recent AP wire story
proves: "Investors are still trading common shares of Fannie Mae,
Freddie Mac and AIG by the billions, even though analysts say their
prices are almost certain to go to zero. All three are majority-owned
by the government ... 'zombie' companies that technically are alive,
until the government takes them off life support" ... and wipes out all
shareholder equity.
Meanwhile, every 20 milliseconds "HFT-Quants" are taking another
"too-dumb-to-stop-trading" little investor trapped in the illusion that
Fannie, Freddie and AIG will "be worth something, someday."
"HFT-Quants" don't think long term. Their algorithms think in
milliseconds, just enough time to skim more money from all the 'dumb
money' out there.
And here are the advantages that differentiate the smart, top-tiered HFT market players, from everyone else in the new marketplace battleground according to MarketWatch:
-
Real estate.
"Infinium Capital is the biggest market-maker in natural-gas futures
and runs its computers in 100,000 square feet near the Chicago River." -
Servers and screens. "The core of its operation is 40 racks of servers overseen by quant traders who man up to a dozen screens each."
-
Energy.
"Infinium's operation runs on a piece of the public electricity grid
backed up by two separate power substations and 196,000 pounds of
batteries." -
Backup power. Still the system's "not safe enough. Infinium is paying to install a 2,000-kilowatt diesel generator just in case."
-
Data transmission.
"Infinium taps into the CME Group's computers ... via dedicated
fiber-optic lines capable of transmitting up to 5,000 orders per second
with a lag time of no more than 10 milliseconds." -
Tech centers.
The competition is pushing to be as "close to securities exchanges as
possible" to cut transmission time. "Six square feet of space in the
data center where the big exchanges also house their computers goes for
$2,000 a month." Many trading firms "spend 100 times that to house
their servers ... NYSE plans to open a 400,000-square-foot tech center
in New Jersey."
And the conclusion recap:
In this new reality "they are able to scoop up a spread of a tenth or a
hundredth of a penny per share thousands of times a day" on billions of
shares traded every day.
Only a fool would bet against the new HFT-Quants or challenge them out
there on "The Singularity" battlefield, where "the high-frequency boom
is reshaping securities markets everywhere." Don't trade, stick with a
Lazy Portfolio of no-load index funds.
Yet it would be a one-sided perspective if the other point of view was ignored, which is why we present Rosenblatt Securities massive, 34 page long, spirited defense (which amusingly takes a jab at the "eruption of blog postings...often breathless in tone and accusatory in tenor") of why HFT is so great for everyone involved, or at least for those who provide "liquidity" while tricking those day trading gamblers who just need to get their fix...one more time. Even if it means ongoing, recurring losses. And while the entire memo is below, the following chart should quickly indicate why the current "breathless accusations" of HFT stand to generate massive revenue losses for a product that now dominates virtually every vertical of the equity markets:
Full report for those who have had their caffeine injection:
Yet even spirited defenses deserve their fair rebuttals, and we present one prepared by the principals of Themis Trading:
HFT defended in 30-something page Report BY HFT Sponsor.
There is report being passed around by one firm , who self-admittedly counts ” a handful of HFT firms as sponsored access customers”. Firstoff, anyone want to guess what % profit for the “agency broker” these “handful of HFT firms” account for?
He dismisses our concerns with HFT (”a blog post here, a white paper there”) as not meaningful. Senators, hoardes of buy-side traders, traditional broker dealers, and the longtime owners of our financial systems (ie John Q Public) disagree. I actually find it amusing to note the lack of trading experience, and lack of long term perspective, among the most vocal critics of those who question HFT. In addition we are amazed that every defense of HFT that we see in mass media is raised by either those who work in HFT, or are a consultant to HFT, or a technology provider to HFT, or an exchange courting HFT flow, or someone selling access to HFT.
As for us we have no stake in this debate. Actually you could argue that we should keep quiet, as the more sinister a market environment created by HFT, the more value we can add to the trading equation, and the more successful our firm will be. So why are we raising Cain? We don’t think this market environment is healthy, and we plan on being around for the long haul. It would be nice if the market were not blown up in the interim.
Our concerns our summarized here: http://advancedtrading.com/algorithms/showArticle.jhtml?articleID=220300593
And we think we can be more succinct than their 34 page defense:
Is liquidity in the already-liquid top 100 names in the market, and sub-penny price improvement, worth creating a multi-tiered and opaque market self governed by the same folks, who have already time and time again, demonstrated their lack of ability to restrain from highly damaging excess?
One more point that should tell you everything you need to know. Notice the hoardes of talent poaching and defections from traditional brokerage firms and exchanges (not typically underpaid folks to begin with) to HFT firms?
I sure hope rationality trumps greed by the time this is said and done.
At the end of the day, someone is right and someone is wrong. With the SEC now actively doing a thorough investigation of the entire market landscape, we and everyone else can only hope for a fair assessment of just who is it that profits on the back of those naive day traders who day after day have to battle with the "HFT-Quant Singularity." And, as Zero Hedge discussed previously, Mary Schapiro's reputation and legacy is at stake on this one: a mere check mark or stern warning will no longer do, as there are much higher political interests involved. We will continue covering this debate through whatever conclusion it may ultimately reach.
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TD and Staff: Another great piece of editorial exposure. Good work.
Check out this fine piece of advice from the WSJ- Hedge your mortgage rate with call options on long term bonds...
http://finance.yahoo.com/loans/article/107897/worried-about-a-mortgage-r...
People should go to jail for recommendations like that.
How about simply taxing profits on trades with a holding period of less than 24 hours at 99%
Hopefully another spike in the heart of the Vampire Squid and a nail in the coffin of this practice. This coupled with the story I read posted here about Simmons Mattress company, man. This is not what business is supposed to be about. I wish everyone could see how destructive this all is. No wonder our economy is failing. More people want to cheat than follow the rules.
The Golden Gooose that is our country, may be cooked.
Eat up boys.
Puds.
"Last year Wall Street banks were virtually insolvent. Taxpayers
stimulated them back from the dead"
And created a Frankinstein monster that kills the very people who gave them life
Where is an EMP weapon when you need one.
"More people want to cheat than follow the rules."
The system thought them so. Reward mediocrity and
irresponsibility and just watch. Talk about moral
hazard. And too many rules which makes them
effectively unenforceable. But hey, that feeds
lawyers. Like we need them. Lobbying has a ROI
of 100 and even 1000+. What business would you
rather run ? Black is spun as white. Less bad is good.
Manipulation is for your own good. Run like a rat, eat
shit, shit blood, pay your bills, watch propaganda, repeat.
That whole thing stems from demoralization.
People have lost their values. Its is every man for himself.
There is no common good. Nobody cares.
Thats a road to hell folks. This nation is morally bankrupt
and as a result will soon be financially bankrupt too. And
it wont go down without taking the whole world with it.
It is so sad we are in this shitty state of affairs...
:-((
I could be mistaken but didn't Brucie W and the financial guru's at NY Mag tell you people that HFT is a non-story that funds/banks make little if any profit on the practice? Do what you are told and stop asking questions already!
This debate reminds me of an old observation. When they cannot dazzle you with brilliance, they will attempt to baffle you with bullshit. 34 pages to say; "This is our gravy train, don't rock the boat" seems a bit excessive to nearly anyone not sucking on that particular bit of nourishment.
In the immortal words of Frank Murphy; "Erase them all!".
I am J.A.F.O. and I did it. I am sure it can be done again.
So we are supposed to feel sorry that human day trading speculators and market makers can not compete with their computer counterparts?
Human market makers and day traders who used to help in price discovery have been replaced by more efficient and effective computers.
The old guard complains because they can no longer earn a living as they used to... Their profession is going the way of the horse and buggy driver.
Proximity and speed have always favored some players over others, and there is no way to "level" that playing field. Floor brokers were always faster than people reading the tape, and this is no different.
Computing power and low network latency however do not create a trading strategy - they merely reduce the slipage and beat out their direct competitors (other computers).
Literally anyone with $55K can:
1) Buy a server
2) Open an account with a very fast direct access broker
3) Co-locate with that broker
4) Have round trip order latency of approximate 10ms
5) Pay the broker ~$200/mo for power and connectivity
There are few businesses with such a low barrier to entry.
The issue is not one of equal access - it is rather different skill sets and abilities.... and the only way to level that playing field is to halt all trading.
Anyone else smell a troll ?
So because I am not in the Tyler echo chamber of thinking that computer trading is evil, I am a troll and you flag my comments?
Nice... way to have a balanced view of the world and understand issues.
dickdick,
What of the argument that HFT is:
a) a form of frontrunning and
b) not something that is there to help the business being invested in, but a way to layer in middlemen who can skim from the velocity of the exchanges?
I invite you. Help me understand.
I thought the markets were there to provide businesses money and people the opportunity to invest and potentially benefit from helping a business out?
Christ. While front-running certainly exists under the HFT banner, the majority of what most would consider HFT is not front running. The only people who believe so are consistently losing day-traders who cannot accept their own inadequacy and look to blame their problems on others.
This did not answer my question or address my points. I am not a daytrader (winner or loser). You have overgeneralized.
It seems rather scientifically insufficient to constantly blame yourself. I mean if you do that then you are negating millions of other causalities. Though when you are really blaming the people really responsble for really fucking something up. I find they don't appreciate you being right about it and want you to look at yourself.
Shortly after I reached the deepest understandings of my life. I had a nice dream where I was in college and I was failing and it was all riddled with anxiety and when I woke up... I laughed and laughed and laughed about it. Cause I had just ro sham bo'd the universe right in the nut sack. And you know that had to have been the best dream of my life. Because there was just so much anxiety and they tried really hard to put it all back on me. I just hope they can laugh with me cause if they can't i'll keep laughing at them till they can.
If you want to learn something, read the article Tyler posted about HFT and get yourself a copy of "Devil Take the Hindmost".
Markets are there to allocate capital efficiently, but they can not do that with only investors and companies...
Do you question the value of your broker or exchange in the process? That about clearing firms, data providers, and dare I say - market makers who bridge the temporal gap between 2 investors on the opposite side of a trade, but at different times?
And what is it with this site that people must resort to name calling. Such childish behavior... and oddly mirroring more and more each day the movie from which it draws... (i.e. Tyler has a growing legion of drones hanging on his every word).
I thought you were a troll, baiting us with a name like peterpeter. So, is it peterpeter pumpkin eater? I don't have the proper cultural referants to make sense of your chosen screen name.
I apologize, sort of.
I question everything right now, brokers [BIG HUGE TIME], and the rest of your list. I see your point of view as something that has to come from someone who is a) a babe in the woods, being raped and slowly eaten to death [doubt this] b) a shill c) one of the scumbags who has no heart and no ethics regarding who you cheat or how you cheat them. The $ is your final destination.
Your original post was arrogant. You came to fight club and posted that and then get all shocked someone calls you a dick?
Please.
I fail to see how a name like peterpeter is materially different from a name like McCreant. My first name is Peter, and that username was taken...
I am neither options 'a' nor 'b', but find your list grossly incomplete.
I am a self employed (sole employee) of a statistical arbitrage trading firm. On a daily basis, I see more of my trading opportunities taken by the likes of GS and GETCO than I imagine nearly everyone else on this blog - but that is not for lack of opportunity on my part to compete... rather, they have more talent in aggregate than I do as an individual. I can still make a living at it though, and therefore find the comments by those who don't know what they are talking about regarding HFT as drivel.
When I make trades, I am correcting pricing errors in the markets, and therefore aiding in price discovery, and the allocation of capital. If you choose to view that function as one with no heart and ethics, that is the choice of your moral compass. If you think it is cheating, you are badly mistaken.
As for being arrogant, I think you may want to re-read your posts in that light.
It's quite interesting that as Tyler increases the vitriol, the blog has gotten a larger following - and has strayed further and further from it's manifesto:
our mission:
Peter,
People are angry. Do you think they do not have a right to be angry? Honestly? Do you not have permission to be angry yourself? Are you superior to those who are angry because that makes you more civilized?
Try this. I have one tiny story. Multipy me across the US, indeed, the world:
My mother is mentally disabled. A fund exists to take care of her because my family was wonderful and a tad bit clever. We have not in any way drawn on funds from the state (until these last few years where she got social security). In 2005-6 I saw this crisis coming and pulled out of the markets. I won't go back in. I begged my aunt in early 2007 to pull my mother out. I sent her article after article about what I thought was adding up to a disaster. She goes to see the broker. The broker tells her everthing is fine and to stay in. Who is my aunt to believe? An expert or me? She stays with the broker and you know the rest of the story. My mother's account lost $94,000, maybe not a big deal to you, but to our family IT IS A BIG FUCKING DEAL.
So maybe I want answers about what happened. Actually, I am pretty sure I have some of them already. Some dumb assed, broke down broker couldn't see what I, a non-professional investing member of the public, thank you very damn much, could see and, because of a competetion of credentials (I am a mere neice with a PH.D. that is NOT in economics) she chose him and we lost.
And so now, in a declining economy, with state funding folding, we have to figure out what to do next. We are not sure when her money will run out but it is running out.
That broker ripped off a little old retarded lady because he wanted his. What does your moral compass say about that? The best advice for my aunt would have meant him giving up something. He wasn't about to advise against his own interests even though it would have been in my mother's interests.
Your type might say "Well, too bad, that is the way the cookie crumbles." But that is the problem with the whole finance culture. The dollar, yen, whatever, is the bottom line.
If my participation here is too far from the manifesto, well, you are sensitive so I will keep those comments to myself.
From everything I read HFT does not help build businesses, it steals from them. It is a way to skim money. Furthermore, if the volume is primarily these computers talking to each other, there is no intrinsic value coming out of these trades.
When the tsunami dump after the pump from HFT lands on shore, guess what?
I'll meet you back here and I might even hold your head while you cry. You will be as angry as I am. That's what this nonprofessional who should not be commenting on this board, sees as part of the coming package of surprises.
Hey,
I feel for your loss. Really. Congrats on sticking to your guns and being out of the market during the carnage of last year.
If you believe that I have sympathy for human brokers on average, you are wrong. Once the marketplace moved to electronic order entry (care of the machines - that you very much), the only value for a human broker was if s/he could add value by directing his/her clients into sound investments (or even better yet, if they could focus on capital preservation for most of their clients).
Most brokers are however compensated by having both a large book of business and a high number of transactions... so the brokers are usually (not always) driven to get clients to invest more and more funds, and to make trades.
It is the near-sighted leading the blind... and where you do find an honest broker who is looking out for his/her clients and does have a long term view of the economy and markets, they are not rewarded financially by thier firms...
However, if you believe that HF market makers and stat arb funds are the cause of the insane valuations followed by crazy market blow-off, I believe that you are mistaken, and that in your quest to find an answer, you picked the wrong one.
I could lay blame at Greenspan, Bernanke, central planners in China and their desire to buy US debt, condo flippers in Miami and Las Vegas, mortgage underwriters, FHA, FNM, FRE and a zillion other players - all of them human.
There is an intersection of banks (traditional and investment) that helped cause this mess and those firms active in HFT - with GS prominent in both arenas, however the HFT activities themselves and the firms that are purely HFTraders are in my view not in the slightest way responsible for what has transpired.
Please do read through the PDF Tyler attached. There is a wealth of information in it, and if you have any PhD, I trust you'll be able to follow along and read it in under an hour or so.
When your time horizon for holding positions is measured in time spans well under a day - you don't worry much about the Tsunami... and you are likely hedged intraday anyway.
All marketplaces need more than just willing buyers, sellers and issuers to function well, and the HFT has displaced the human market maker. In so doing, the spread that the real investor pays is reduced (not because the HFT firms are generous, but because the competition is much more intense than the human monopolistic market makers were trading 1/8ths) - and the massive transaction volume and competition amongs exchanges/ECNs has radically reduced transaction fees.
As for the comment about the majority of volume being from HFT - you should recognize that the 70% figure means that there is a HFT involved in roughly 35% of the trades... since Larry Tabb counted a trade as HFT if either the buyer or sell is a HF firm, but the denominator (trade volume) counts each transaction only once.
I don't take issue with you being upset with the way the economy has collapsed, nor with the hardship your family has due to a lame broker and illness.... but just because you are upset and it's easy to dislike GS and computers doesn't mean that your disgust with HF is well founded.
The only question that matters here is: are they front running their clients or not?
If not, then you are right- my hat off to them.
If they are front running, then this is illegal.
Most HF Traders do not have clients.
to PeterPeter
6) place gonads on the line
Otherwise agreed.
Isn't that what all trading is about? Despite common misconception, high-frequency trading is not inherently risk-free. In fact the probabilities of winning on any given stat-arb trade are just a hair over 50%. The law of large numbers is what pushes them into profitability.
PP- I'm with you. As a former market maker (now horse and buggy guy) it was pretty clear from the late 90's on that this was going to be a race that ended up being won by expensive algorithm writers.
HFT's are the new trading floor market makers. Inefficiencies across markets that used to require thirty seconds of phone calls and hand signals to trading pits are now arbitraged in less than a second. Instead of bid/ask profits going to a few guys in a pit (sometimes the guy who was bff's with the broker) it goes to the faster system. It rewards doing math homework not being in the lucky sperm club of being born in Chicago/NY/NJ and having an uncle or father that was an exchange memeber.
Not everything that goes on with HFT is good but there was plenty of funny business when humans did it too. One of the reasons things got so out of hand in the '87 crash was a floor broker disclosed that he had an order to sell an enormous amount of S&P contracts to traders around him (it was reportedly Soros selling and there was an undisclosed settlement b/w him and exchange members for the day of the crash).
It seems that the govt should focus more on trying to find algorithms that try to set off behavior daisy chains like setting off large stop orders than shutting down HFT as a whole. It can provide very efficient arbitrage.
I don't make nearly the money that the floor used to provide but I don't hate HFT. For me it was a race to make money before technology prevailed and made us buggy drivers.
PeterPeter, my friend, you are either confused yourself, or a clever man who is trying to get the crowd hanging around confused. Ducky, were you a MarkerMaker ? It is not hate/love HFT. You cant tell people how many times a day to buy and sell. The exchange is for the public to trade. Not machines. But when we are talking GOLDMAN-AND-THE-LIKES LEVERED 40+/1 WITH BIG IRONS NEXT TO THE EXCHANGE'S IRONS ACCOUNTING FOR 70%+ OF THE VOLUME ??? EXCUSE ME !!! TRY AGAIN- FEW HUGE PLAYERS DOMINATING THE VOLUME ??? THATS SUPPOSED TO BE WHAT ? MARKET ? WHOSE MARKET ?
The truth is, the market had been hijacked. It was created for one purpose, but then a big boyz with big gunz moved in and everything changed. That needs to be rectified and justice restored. The argument "you go buy big gunz too" does not hold water. Arms race is not the solution.
Here is some short info who all of you should have read BEFORE chiming in:
http://en.wikipedia.org/wiki/Market_maker
http://en.wikipedia.org/wiki/Algorithmic_trading
Where in the later there is this nice description:
"
Market making and high frequency trading
Market making involves placing a limit order to sell (or offer) above the current market price or a buy limit order (or bid) below the current price in order to benefit from the bid-ask spread. Automated Trading Desk, which was bought by Citigroup in July 2007, has been an active market maker, accounting for about 6% of total volume on both NASDAQ and the New York Stock Exchange.[13]
High frequency traders use computers that execute trades within milliseconds, or "with extremely low latency" in the jargon of the trade. In the U.S., high-frequency trading firms represent 2.0% of the approximately 20,000 firms operating today, but account for 73.0% of all equity trading volume.[14] As of the first quarter in 2009, total assets under management for hedge funds with high frequency trading strategies were $141 billion, down about 21% from their high.[15] The high frequency strategy was first made successful by Renaissance Technologies.[16] High frequency funds started to become especially popular in 2007 and 2008.[15] Many high frequency firms say they are market makers and that the liquidity they add to the market has lowered volatility and helped narrow spreads, but unlike traditional market makers, such as specialists on the New York Stock Exchange, they have few or no regulatory requirements.[17]
These funds are highly dependent on ultra-low latency networks. They profit by providing information, such as competing bids and offers, to their algorithms microseconds faster than their competitors.[4] The revolutionary advance in speed has led to the need for firms to have a real-time, colocated trading platform in order to benefit from implementing high frequency strategies.[4] Strategies are constantly altered to reflect the subtle changes in the market as well as to combat the threat of the strategy being reverse engineered by competitors. There is also a very strong pressure to continuously add features or improvements to a particular algorithm, such as client specific modifications and various performance enhancing changes (regarding benchmark trading performance, cost reduction for the trading firm or a range of other implementations). This is due to the evolutionary nature of algorithmic trading strategies - they must be able to adapt and trade intelligently, regardless of market conditions, which involves being flexible enough to withstand a vast array of market scenarios. As a result, a significant proportion of net revenue from firms is spent on the R&D of these autonomous trading systems.
"
Now, I hope you all see:
MarketMaking is NOT HFT
HFT is NOT MarketMaking
(although it conveniently pretends to be)
Last but not least: Investing is good. We all know what investing is. Except few HFT's who conveniently forgot. Trading is parasitism. The mere fact the HFT exists, means they succeed. Means they are fleecing everyone else. How ? By creating the very volatility they NEED TO SUCCEED. It is a self fulfilling prophecy- the freaking holly grail of parasitism ! There is only one problem. When they steal all the money- game over. Then HFT's will be hung on the lamp poles. And the game will start over. So what was the point to begin with ?
"The exchange is for the public to trade. Not machines." Says who? Did this come down chiseled in Moses' stone tablets? The machines trade based on algorithms developed by members of the public. You seem to think exchanges are the financial equivalent of a national park. They aren't.
40:1 leverage is common for day traders in futures markets as long as you are out of your position by the end of the day. It is nothing new.
There is a reason that Goldman's platform and others beat the NYSE. It is because the lucky sperm club market makers on the NYSE fought electronic trading instead of investing in it. The exchange got so far behind in the technology race that they could not catch up. Now they are toast.
There is basically one exchange that survived the transition from floor trading to electronic. It is the CME. They invested early and told the members it had to be done. The CBOT and NYMEX had the same attitude that the NYSE had. Since it would take their $ away they would fight it. They never caught up, constantly having to go back to listing their products on the CME's globex while they tried time and again to jump several generations ahead in the technology race. In the end they were bought by the CME.
The paper above left out the history of order matching engines. The early electronic order matching engine at the CME matched 20 trades per second. Around 1998 or so a new engine was developed and rolled out that would match 100 trades per second. In busy pit trading you had more than 20 trades/second going on in the S&P and NASDAQ 100 but probably not more than 100/second. When the engine that matched 100/sec was released it was evident that the end of pit trading was on the way. Toss in the movement from dial-up to broadband over the next few years and customers just needed to be connected and the electronic market makers had to figure out how to do what was done on the floor.
mitack-from your wikipedia link (because they are the go to source) "Algorithmic trading may be used in any investment strategy, including market making, inter-market spreading, arbitrage, or pure speculation (including trend following)."
Finally an enlightened response. The witch hunt and lynch mob types have taken over this site.
Here here. If I hear the word bankster one more time it's me that's gonna brandish my pitchfork at this tin-foil crowd.
Bring it.
very well said, Peter
Literally anyone with $55k can:
1) Buy a server
2) Set up several websites to spread botnet infections to windows users
3) Use these botnets to spam email addresses and phish for private infomation.
4) Make upwards of 300k a week just by stealing from people.
There are few businesses with such a low barrier to entry.
The issue is not one of equal access- it is rather different skill sets and abilities... the only way to level that playing field is for people to get smart enough to use linux or mac osx or be able to recognize phishing emails.
The liquidity argument: "Liquidity is a benefit when I am providing it and profiting from it"
first of all there is no use even wasting time describing how much more advanced they are, they are several orders of magnitude ahead
the funny thing is, its getting to become a crowded trade, everyone is super fast now, accessing to super liquidity and crossing networks, so the gains for most of the pack aren't as hot as they once were, especially in the face of ever increasing costs of engineers, servers, and co-location fees.
once you put those fixed monthly costs into your trading equation I'd take a steely eyed macro hedge fund manager over 99.9% of HFT funds, except renn tech and getco
And if your "steely eyed" manager goes the route of mots hedge funds, he'll make a handsome profit while you eat the high risk profits that rapidly turn to losses. Having pushed the high water mark up so high in year two, and ravaged by withdrawls in year 3 and 4, they'll close up shop.
You'll be out 64% of your money, and they'll be up their management fees and the 20% of all profits made in year 1 and two.
Hedge funds attract the big money fish. For the po folk, there's dice games on the street. Both have the same result in the end.
speaking of corrupt market making, ZH never covered this fed report that reviews pit traders and their market making schemes
the summary:
- Dual and local traders are clearly speculative in their market making activities
- Dual traders mostly tend to 'lean' (front run) towards the same direction as the order flow that they are supposed to be servicing.
It isn't front running when you sell 10 contracts and all of a sudden a large buyer comes in to buy 200. It is called price discovery. As in you just discovered you are about to get run over by Morgan, Goldman ect... You get out and don't sit there acting like what they taught on a college econ chalkboard is going to keep you alive.
crap here is the link to the fed report:
http://www.newyorkfed.org/research/staff_reports/sr395.pdf
Isn’t the function of the stock markets, a place to buy and sell shares that represent ownership in a publically traded company? Theoretically, I should be able to analyze a company and based on that analysis make the decision to invest my capital in what is meant to represent a minuscule ownership position. Hopefully, I receive growth of capital and maybe a dividend.
Why are these thieves allowed to create monsters like program trading and high frequency trading and contaminate the very essence of what the stock market is supposed to represent?
My favorite from the peeps at 20 Broad:
Rosenblatt's Myth #5
"Co-locations give HFTs an unfair advantage"
OK its just a myth, thanks for clearing that up.
they did a pretty good job explaining that there are no restrictions on co-location: that anyone can do it, and made a pretty nice analogy to anyone being able to hire top trading talent if they so desired. it's a business choice you make
dewd, what good is being co-located if you don't have the buying power to send out 5,000 orders per second?
you do it on a smaller scale. until you get the buying power to scale it up!
The big issue with HFT is that it inhibits real price discovery. The fake volume removes any meaning from the price.
Full post here:
http://pminvest.blogspot.com/2009/09/market-volume.html
Exactly...
After all has been said in the comments, this is one of the most critical problems with HFT. Regardless, if even you
choose to co-lo with the big "boyz" and have low latency,
their guns are bigger than yours and they have more
bullets.
Question this? Try and trade 2,000+ shares
and watch the Bots hammer you to the back and get 10-
20 different fills. It is hard to be a sniper when they
have high cyclical, water cooled, machine guns filling
every square inch of trade space. You have to get mighty
thin, mighty quickly.
Anyone following the Hal 9000's & HFT's 70% total daily "volumes", driving bankrupt companies like: FNM,FRE,
AIG,C and BAC to new "highs" over the summer surely
must have wondered about true price discovery.
Being able to blast a fire hose at any stock with "high" volume, low latency dueling Hal 9000's will disrupt
actual price discovery.
Didn't that used to be what the markets were about?
Exactly...
After all has been said in the comments, this is one of the most critical problems with HFT. Regardless, if even you
choose to co-lo with the big "boyz" and have low latency,
their guns are bigger than yours and they have more
bullets.
Question this? Try and trade 2,000+ shares
and watch the Bots hammer you to the back and get 10-
20 different fills. It is hard to be a sniper when they
have high cyclical, water cooled, machine guns filling
every square inch of trade space. You have to get mighty
thin, mighty quickly.
Anyone following the Hal 9000's & HFT's 70% total daily "volumes", driving bankrupt companies like: FNM,FRE,
AIG,C and BAC to new "highs" over the summer surely
must have wondered about true price discovery.
Being able to blast a fire hose at any stock with "high" volume, low latency dueling Hal 9000's will disrupt
actual price discovery.
I take serious issue with Saluzzi's claim
"As for us we have no stake in this debate. Actually you could argue that we should keep quiet, as the more sinister a market environment created by HFT, the more value we can add to the trading equation, and the more successful our firm will be."
On the contrary - Saluzzi cannot compete with the HFT algos - they make his job significantly more difficult, and there is no doubt that his job would be easier without their competition in the markets. The reason SigmaX is the most popular smart router is because it's the best at dealing with the HFT algo's.
I laughed inside a bit when I read that as well (Saluzzi's nonsense).
In his first TV appearances after publishing his first "white paper", he was touting his firms ability to "work an order the old fashioned way".
Joe and Sal have been trying to get something to gain traction and put their names out there, and they've been quite successful at that... How that relates to increased business is an unknown, but the goal seems rather transparent.
I'm still amazed that with all of the hot air Joe and Sal have spewed on Flash, that they still haven't once just said "send your orders to a different ECN".
KidDelish, so you think Sigma X exists to benefit the traders in all that darkness or to benefit the vampire squid?
The markets simply need to be improved from what they are....and the US is very very close to a structure that will create the Golden Years like the US has never seen....
Firstly....both Democrats and Republicans will have to agree that a 15% Consumption tax should totally replace the current system....because under the current system and economic climate ....the percentage of people actually owing US taxes will drop from 53 to maybe 10% of the population....
A 10% State....5% Fed Consumption tax take will:
1) Dwarf the tax take from the current structure...
2) Eliminate the IRS
3) Eliminate Tax Havens
4) Will out-compete other countries on tax structure alone....which means the best talent, jobs, and corporations flock to the US....
5) Will eliminate the lobbyist system...to be replaced by state mandates only....
And here it is about securities....
1)No taxes of any type....in the name of efficient capital....
2) Fully electronic de-fragmented direct access exchange
whereby no dark pools are allowed....in other words all public price discovery takes place on the exchange and nowhere else...
3) Securties information is in wiki format and is free to the public....
4) Short selling is limited by float size....first come....first served....by electronic tag....no uptick necessary....no location required....
5) No minimum....no maximum account size....
6) Margin.....4:1 intraday or overnight....
7) All securities worldwide....bonds...stocks...commodities...
8) Size restrictions per account subject to float size....
9) All accounts pay the same transfer fees .....ie 20 cents per 100 units....
10) US legal largess has to be largely eliminated in the name of efficient capital....
11) The new securities regulator is mostly an electronic monitor around reporting periods....and size limitations.....
The US is at a crossroads....go one way ....and the exchanges will prosper "elsewhere"....
Go the right way....and enter the new "Golden Age"....with personal freedoms and progress no single has ever experienced before....
Of course this is after invoking Glass Steagal...and requiring banks to go local....and for IBs to be supplying public symbols for the exchange....and staying out of customer conflicts....ie not allowed to form hedge funds etc....Banks and IBS will not be allowed in the Hedge Fund business due to conflicts of interest....
The exchnage is now just "software" and can be anywhere....
De-fragmented exchange....all public securities
Amen brother. Wont hold my breath though...
It's the new Vegas, baby!
I think that is the overall hope of Wall Street. Everything is being designed for immediate gratification. Your in, your out.. house gets its cut. You want people to remember their wins, and forget that overall they lose a little every month. It's exciting to play a game of chicken on AIG, laying your money down and trying to get it out before the house makes its move. The house wants to keep the game going, so it wouldn't do to wipe out the little fishies. Of course it is the game of the pros to wipe up the little fishies.
I have recently changed my ideas on this level of the game.
All that table above says to me is don't trade US markets, let the HFT programs cannibalize each other, and scalping may be dead. That doesn't mean trading is dead.