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Tobin Tax Opponents Are Ignoring The Real HFT-Induced Trading Toll; Why VWAP Is A Gold-Mine, But Not For You

Tyler Durden's picture




 

With the debate over Tobin tax increasingly appearing on the front pages of the mainstream media, we thought we would revisit a theme discussed previously on Zero Hedge, namely the issue of whether or not the predominant trading paradigm, i.e., High Frequency Trading, offsets trading costs as proponents of this trading strategy claim. We had previously proposed some broad estimates in quantifying the cost of HFT: our results received the stern condemnation of those whose livelihood is dependent on microsecond speculative scalping of pennies on the dollar, thousands if not millions of times a day, under the guise of "liquidity provisioning." It is precisely these people who are most opposed to a trading tax as it will make most HFT-based strategies prohibitively expensive. And while a final proposed version of what a tax might look like is still to be determined, it is only reasonable to expect that it is most punitive to those that do the opposite of allocating capital on a long-term basis, and thus most detrimental to those parties who merely churn stocks under the "noble" pretense of providing liquidity. Of course, that this liquidity is provided in the most liquid of names as is (and of course those above the $1 rebate-collection threshold), is often ignored.

Furthermore, we have historically been very critical of VWAP algorithms, pitched by the likes of Goldman Sachs in their REDI trading platform as the core trading strategy involving non-dark liquidity and trades in open exchanges (of course for those who prefer to be exposed to Goldman's much more principally lucrative proprietary bid/ask in a dark pool venue, Goldman has Sigma X for that).

A recent research report by Quantitative Services Group presents one of the first empirical studies confirming our hypothesis that in its most frequent incarnation, VWAP algorithms, HFT not only does not reduce trading costs, but in fact augments these, and adds a further destabilizing factor of leaving the initial trade open to major predatory algo exposure courtesy of advanced adverse selection sniffing algos. The combination of these two has a much more adverse impact on overall per-trade P&L than an incremental tax, as associated implementation shortfalls and liquidity charges can quickly overtake even the "draconian"0.25% tax per trade currently proposed (a number which will likely be lower in the final proposed version of the bill, and will likely not have an impact on retail daytraders who for some reason seem to be the most vocal opponents of DeFazio's proposal). Yet this embedded toll is something considered normal as its trade off is a purported liquidity improvement. However, as much literature has demonstrated, HFT strategies do not provide liquidity equally across the equity landscape, and only the top 10% of all names, usually those that already have substantial natural flow, are the ones that "benefit" from HFT involvement. Why the Tobin tax outcry is not focused much more sternly on precisely this externality "leach" is very much unclear.

And the tradeoff is that while in the Tobin tax scenario at least money could be used to replenish some of the already empty vaults of the US government, the HFT toll is purely to the benefit of the Wall Street, and Chicago-based, fat cats. Which is why you can expect the Wall Street - D.C. lobby to scream bloody murder as the existing "market toll" status quo is threatened.

As the conclusion to the QSG report finds the "results indicate that there is a significant difference in the costs and trading velocity of VWAP algorithms when compared to Arrival Price algorithms, especially when applied to low price stocks. The Tracking Error (PWP) measure confirms most VWAP algorithms are challenged to beat a 10% PWP benchmark. This result is consistent with both the negative impact of certain HFT strategies and the possibility of positive momentum in institutional order flow." The punchline that "the average impacts for VWAP algorithms are nearly double those of Arrival Price algorithms" dictates why all HFT proponents (and certainly oponents) would be well advised to read the paper's findings: "This is a significant revelation to proponents of VWAP algorithms as a low impact strategy that flies under the predatory HFT radar." And as people react much better to actually quantified tradeoffs, here is the opportunity cost of VWAP for the select group of study participants: "The incentives to take action to prevent such impact costs are compelling. If the impact costs realized by the VWAP algorithms were reduced to the level of the Arrival Price algorithms, the clients in this study would have reduced trading costs by $35 million."

Below are more of the paper's findings. First, QSG recapitulates why HFT has become such a prevalent topic in 2009. This part should come as no surprise to Zero Hedge readers who have seen this topic dissected here before anywhere else in the MSM or the blogosphere, starting in March 2009 (highlights ours throughout).

HFT has dominated the securities trading industry headlines for much of 2009. In reviewing the portrayal of this activity by the industry’s media sources, we discovered a mixture of concerned curiosity and outright disdain for HFT from outspoken representatives of the buy-side and agency-only execution providers. Recently, support for the practice has emerged from a few buy-side firms and many of HFT’s more public practitioners. Industry blogs and self styled ‘white papers’ have gotten the attention of Congress, and the SEC is considering regulatory changes, already taking steps to curb an HFT-related activity called ‘Flash Orders’. The uproar surrounding HFT has been created largely by anecdotal evidence from traders and the soaring profits reported by the HFT operations of a few firms forced to disclose their results to the public. Unfortunately, there is little empirical evidence on the effect that high-frequency trading has on traditional institutional trading desks that are employing non-HFT strategies. In this report, we leverage QSG’s proprietary tick-based transaction cost attribution methodology to reveal empirical evidence confirming that significant increases in market impact costs are being experienced by certain types of institutional size trades. This report, the first in a series, will focus on a surprising segment experiencing HFT impact, executed through automated algorithms in liquid US stocks - VWAP targeted orders.

For those still new to the concept of HFT, QSG provides a good and brief overview of the evolution of HFT strategies:

The definition of high-frequency trading is both broad and evolving. As the name suggests, it generally involves trading strategies that rely on rapid, large scale order executions facilitated by advanced computing and communications technology. The significant data, order routing and communications infrastructure that supports HFT strategies are designed to virtually eliminate execution delays or ‘latency’. At its most basic level, the capacity to execute instantaneously creates the ability to arbitrage prices across execution venues, of which greater than 40 exist in the US alone. This profit making opportunity is then augmented by two additional strategies that are pursued exclusively or in combination: electronic market making and statistical arbitrage.

Electronic market makers create two-sided markets with the goal of profiting from the spread between the prices at which they buy and sell. Through changes in regulation, increases in volume, the introduction of decimalization and the automation of the trading floor, market making has significantly evolved over the last decade. The challenges to the business model of market makers include dramatically narrowed bid/ask spreads, fragmented markets and an increasing number of competitors. Today, market makers rely on sophisticated statistical models and trading algorithms that have automated the previously manual decisions as trading flows have increased dramatically and executions are measured in milliseconds. In addition, exchanges and ECN’s provide incentives for electronic market makers to provide liquidity by offering a rebate on trades, usually about $0.20 per 100 shares. Firms like Global Electronic Trading Company LLC (GETCO), Tradebot Systems Inc., Hudson River Trading LLC and Wolverine Trading LLC are examples of large electronic market making firms.

The other broad category of HFT profits come from statistical arbitrage (stat arb). Similar to electronic market making activities, stat arb shops using HFT strategies leverage a combination of low-latency trading technologies and an automated decision engine. The statistical patterns that these strategies exploit generally occur intra-day and don’t require overnight positions. Statistical arbitrage strategies in a high-frequency setting analyze price, volume, depth of book and trading velocity patterns to identify exploitable price trends. These price trends can be very short and shallow, created by a temporary liquidity imbalance, or they can be much longer in term and quite large, created by a large institutional buy/sell order. In the former, the role of the HFT stat-arb strategy is very similar to the market maker’s role. In the latter, the role of the HFT stat-arb strategy is very similar to trading ahead of the institutional order. In such cases, the stat-arb profits are not necessarily derived from a spread premium and rebate; they profit by ‘surfing’ the price moves available by trading alongside the institutional orderflow. Identifying such orderflow can shift the probability of profit in favor of the HFT and in some cases create a significant liquidity imbalance of its own. These circumstances have the potential to dramatically increase institutional trading costs.

The last point is critical to explaining the explosion of child algos in recent years, whose sole specialty is chopping up large orders into small, statistically non-significant order flow, which presumably does not raise the red flag for stat arb frontrunners. Alternatively, controlling the primary venues in which the child orders are created (i.e., Goldman's REDI) hands the keys of the kingdom to whoever is in charge of the primary child order splitting algorithm as nobody is as able to reverse engineer it as those who create it, and update it, often many times during the day.

The one factor consistent across all HFT strategies is that they benefit from increased volumes and micro-second execution advantages. The majority of profits are made on razor thin margins. For example, market makers are often executing trades with gross margins of 0.05% or nominally between one and two-tenths of a penny. Of course most of the volume in equity markets is concentrated in the largest capitalization stocks with the narrowest spreads and the lowest price volatility. These characteristics attract the attention of HFT strategies; essentially, trading begets trading in these names. Non-HFT trades (now thought to be less than 50% of overall equity trading) are necessary for HFT strategies to flourish. In order to manage the trading velocity required by HFT strategies, firms must often submit and cancel thousands of orders per second while simultaneously monitoring the market data that drives their automated trading systems. To get the broadest and fastest access, many HFT firms subscribe to enhanced market center data feeds like NASDAQ’s ITCH or BATS’ FASTPITCH, in place of feeds from the slower consolidated Securities Information Processor (SIP). In addition to the expensive data feeds, these firms have to invest heavily in their internal systems and data processing engines in order to monitor and process data on thousands of securities simultaneously.  [so yeah, all it takes is an i7 and a $29.95/month program to run a HFT system, right]. The time frames under consideration are so short that many of these firms have taken the step to co-locate their technology inside the buildings housing the exchanges.

Most notably, we would like to draw the attention of Senator Kaufman to the following observation by QSG, as it best represents that current nature of the market, which for months has seen a confluence of declining overall volume coupled with ever increasing statistical arb market dominance. And there is nothing that HFT proponents can say that invalidates this statement:

Much of the media reports surrounding HFT have been focused on the potentially negative impact of such strategies. Proponents of the strategies usually point to the dramatic increases in volume (often equated with liquidity) and declining average bid/ask spreads. However, the collapse in average trade sizes, which dramatically increases the overall number of executions, is often overlooked. This increased trading velocity generates both increased profit opportunities for market makers and greater signaling opportunities for stat-arb strategies.

Another frequent question is just how deep has HFT penetrated traditional institutional order flow:

US equity volumes have grown dramatically in recent years, much of it driven by the emergence of HFT strategies. Notable is the significant overall increase in volume and the number of trades, especially following 2005 (see Figure 1).

A critical observation of who is trading with whom now that HFT accounts for 70% of trades: the conclusion is surprising in its simplicity: at least 20% of the incremental order flow (over 50%) has nothing to do with providing liquidity, thereby refuting all claims that HFT is purely an altruistic strategy seeking merely to benefit all market participants. If that was the case HFT would max out and plateau at 50%.

The prevailing estimates of the daily volume impact of HFT strategies now range between 50% and 70% of daily volume in the US. Of course, as HFT strategy estimates cross the 50% barrier, it is clear that HFT participants are increasingly trading amongst themselves. If electronic market makers are primarily providing liquidity, taking the other side of natural orderflow, then clearly stat-arb strategies that are demanding liquidity (as they seek to identify and exploit orderflow patterns) would account for HFT strategies pressing through the 50% barrier.

While electronic market makers are supposedly ‘providing liquidity when it would not otherwise be available’, what are the effects of their presence when natural liquidity is present? The ‘interpositioning’ effects of high-frequency market makers can cause inflated volumes in very short periods of time. Instead of a single transaction occurring between two natural sides, a market maker’s speed in submitting and cancelling orders may cause two or three trades to occur. The volume inflation and reduction in average trade size that results from these activities especially influences participation-based trading strategies as these algorithms are designed to track market volume. It may also encourage trading algorithms to cut execution sizes into even smaller lots, significantly increasing the number of trades, leading to a new source of exploitable ‘information’ and increased exposure to ‘adverse tick’ risk.

It’s well known that sophisticated stat-arb models routinely monitor market data and the depth of limit order books to detect asymmetries in trading interests. The goal is to exploit and profit from them before the flows reverse and larger traders have a chance to finish their orders. These HFT strategies increase the costs of completing institutional trades and often introduce ‘adverse selection’ as orders are completed in names that are moving contrary to the institutional trader’s investment goals. Our study seeks to illustrate the role of high-frequency trading in the implicit transaction costs associated with participation-based algorithms.

QSG proceeds to provide the results of its analysis:

The data driving the analysis is QSG client executions including data regarding the trading algorithm employed between January 1, 2009 and October 23, 2009. Our sample set included over more than 95,000 orders and represented greater than $30 billion in executed value. To further illustrate the topic, we analyzed the trades between September 10 through October 23, 2009, using the ‘adverse selection’ analysis methodology introduced by Henri Waelbroek et al in a recent study from Pipeline Financial and AllianceBernstein titled "Adverse Selection vs. Opportunistic Savings in Dark Aggregators" [a study presented previously on Zero Hedge].

The T-Cost Pro tick-based attribution methodology matches fill-level client execution data and trade and quote data using a proprietary matching algorithm. Once the data is synchronized, the T-Cost Pro system calculates the cumulative ‘Liquidity Charge’ or footprint that resulted from the client executions. This impact cost is separated from the price impact, or ‘Timing Consequence’, of the competing trades that are responsible for the  remainder of the price drift over the execution period. The technique considers the impact made by each individual execution in the order and accumulates the impact throughout the life of the order.

The sum of the cumulative Liquidity Charge and the Timing Consequence equals the Implementation Shortfall. This attribution allows us to investigate costs at a level that extends well beyond what we can do with the traditional benchmark measures and is particularly useful in illustrating the performance characteristics of algorithmic trading strategies. By separating costs into these two elements we can examine both the liquidity management characteristics and the price trend reaction characteristics of an algorithm. This technique is also better suited for the complex challenge of contextualizing ‘Best Execution’ analysis.

And here is a good reason for why the cheaper the stocks have gotten, courtesy of the 2008 market crash, the greater the greater the participation of HFT in the broader market.

2008’s steep decline in stock prices of large capitalization stocks has introduced an interesting phenomenon. Since most stocks are quoted in penny increments, the minimum tick size for most stocks is also $0.01. This introduces an interesting profit margin bias for HFT strategies. Since profits accrue to HFT on a share basis, low priced, high turnover stocks often have the potential to provide improved profit margins. To account for this we divided our trade dataset by stock price, splitting it into stocks less than/greater than $10 for all trades less than 5% of the day’s volume. We suspect that HFT activity will reflect the margin bias and be more intense in the lower priced stocks. As a preliminary evaluation of this assumption, we measured the Market Trade Velocity (MTV) in the stocks traded in each sample set. We found that stocks less than $10 had 11% more executions per second on average than stocks greater than $10.

Getting back to quantifying the cost of VWAP:

To ease comparisons we categorized the algorithms into two groups, VWAP algorithms and Arrival Price (Implementation Shortfall) algorithms. VWAP algorithms are engineered to execute in-line with market volumes through time, while Arrival Price algorithms are designed to execute near the Arrival Price with less regard for targeted volume patterns and time intervals. Arrival Price algorithm orderflow is often more concentrated, occurring earlier in the execution period. These algorithms are purported to have higher levels of ‘market impact’ than VWAP algorithms, which have reputations for executing at smaller interval volume participation rates.

Here is what the study uncovered:

The first set of results is for the subset of data where we calculated both the T-Cost Pro att ribution measures and the participation weighted metrics. The metrics are presented in percentage terms (basis points) so it should be noted that transaction costs in smaller price stocks will tend to be greater than higher price stocks; this separation improves the quality of our comparisons (Figure 3).

 

 

It is significant that the VWAP costs are larger for all measures during this period.

This is contrary to the perception that VWAP implementations are an efficient way to reduce trading costs, especially market impact. While the average liquidity charge difference between Arrival Price and VWAP algorithms for the greater than $10 category isn’t nominally large, it is greater than 50% greater on a relative basis. In the less than $10 category, the performance difference is striking and significant across all three metrics. The idea that the footprint created by VWAP strategies could be almost three times that of the Arrival Price algorithms has large ramifications for the automated strategies and the possible influence of HFT. Of particular importance in the less than $10 subset is the comparison of Liquidity Charge to Implementation Shortfall. Given that the measured Liquidity Charge is greater than the total  implementation Shortfall, it is clear that the algorithm’s own impact on price is the driver of these transaction costs. These comparisons to the participation weighted benchmark indicate that the Arrival Price algorithms add value in the less than $10 group and slightly underperform for the larger price stocks. The large positive Tracking Error for the VWAP algorithms shows that these orders on average  underperform a 10% participation weighted VWAP by 13 bps in the less than $10 subset. QSG’s attribution to Liquidity Charge and Implementation Shortfall suggest that this cost is not due to price drift over the execution period but rather the VWAP algorithm’s own impact on price.


Of most interest in Table 2 & 3 is the sharp increase in trading velocity (strike participation) for VWAP algorithms in the less than $10 subset compared to those in the greater than $10 subset. The average trade duration only increases by 13%, while the average number of child order executions (strikes) increases by 170%. This is also reflected in the Average Strike Participation, which increases by a factor of 1.75 for Arrival Price algorithms and by a factor of 4 for VWAP algorithms. The much larger number of executions related to VWAP strategies for similar sized orders and trade durations indicates the hyperactive parceling activities of these algorithms in the less than $10 subset of trades. We have found some VWAP algorithms to execute multiple times per second to keep up with volume, exposing the order to the additional ‘adverse tick’ risk that drives trading costs.

 

While both algorithm categories executed near the market average trade size for trades in stocks greater than $10, the values diverge in the low priced stocks. Arrival Price algorithms registered an average trade size (109%) advantage, while the VWAP algorithms show a gap (96%) in the measure. These statistics, showing greater strike participation and smaller execution sizes are indicative of higher velocity trading, which both attracts and is caused by high-frequency order flow. Importantly, it is apparent that VWAP algorithms incur a much greater percent of adverse ticks than does the market during their trading interval, especially when compared to Arrival Price algorithms in the dataset having trades in stocks less than $10.

And the final nail in so many proponents of the "HFT reduces trading costs" coffins:

When the analysis period is expanded to 2009 year-to-date, it’s clear that the trend in high cost VWAP orders persists, especially in the lower price stock category.

Here is the conclusion that Sen. Kaufman should take straight to the SEC and ask why the Goldman study prepared exclusively to perpetuate REDI and Sigma X's monopoly of critical firm revenue streams, does not touch upon at all:

While the average cumulative Liquidity Charge is over 60% greater for VWAP algorithms compared to Arrival Price algorithms in the high price category, they increase greater than 110% in the low price segment. As was discovered previously, the average number of strikes per order increased dramatically for the VWAP algorithms in the less than $10 subset while the trade duration remained nearly constant. In context of Liquidity Charge, this is compelling evidence of adverse execution quality for VWAP algorithms, especially when considering the average adverse tick ratios of 20% for VWAP algorithms year-to-date. The fact that the VWAP adverse tick ratios are three to nine times larger than those of the Arrival Price algorithms is of great concern as these values are consistent with systematic liquidity imbalance biases and predatory competition. In the year-to-date analysis period, we again found all cost and tick metrics averages for algorithms in the same subset to be significantly different at a 5% level.

QSG's conclusion:

Our results indicate that there is a significant difference in the costs and trading velocity of VWAP algorithms when compared to Arrival Price algorithms, especially when applied to low price stocks. The Tracking Error (PWP) measure confirms most VWAP algorithms are challenged to beat a 10% PWP benchmark. This result is consistent with both the negative impact of certain HFT strategies and the possibility of positive momentum in institutional orderflow. This exposes the limitation of such benchmarks in their ability to separate an order’s price impact from price drift associated with other trades over the trading interval. The limitation is overcome by the T-Cost Pro Liquidity Charge measure which is capable of isolating the cumulative impact of each order, revealing that the average impacts for VWAP algorithms are nearly double those of Arrival Price algorithms. This is a significant revelation to proponents of VWAP algorithms as a low impact strategy that flies under the predatory HFT radar.

The details of the study uncover an important artifact from today’s trading environment: increased order parceling has three negative ramifications. First, more ‘strikes’, or executions per order, increase a client’s exposure to adverse ticks and this tick risk translates into higher impact costs. Second, more strikes increase the chances of leaving a statistical footprint that can be exploited by the ‘tape reading’ HFT algorithms. Third, should HFT strategies identify the order and begin to trade in anticipation of the orderflow, this will begin a positive feedback loop that can significantly change an algorithm’s behavior and invite even more predatory orderflow.

The incentives to take action to prevent such impact costs are compelling. If the impact costs realized by the VWAP algorithms were reduced to the level of the Arrival Price algorithms, the clients in this study would have reduced trading costs by $35 million. This study also highlights the value of rigorous algorithmic evaluation measures. The proper trading analysis measures empower equity managers to retake control of the execution process with confi dence, avoiding the errors of anecdotal decision making that aren’t supported by facts of an increasingly challenging trading landscape.

Aside from the critical observations provided for the first time in a formal research-paper that such staple HFT strategies as VWAP do nothing to improve implementation shortfalls, and in fact generate not only adverse executions, but invite the opportunity for numerous additional negative stat-arb initiatied feedback loops, it is likely the case that as more analyses of HFT cost-benefit become public, the general population will soon realize that the already embedded tolling features of HFT far surpass the potential costs associated with a Tobin tax. Furthermore, as a Tobin Tax is a certain way to eliminate a vast majority of the non market-making features of HFT (those which generate the adverse impacts to institutional traders), it is becoming evident that one way to restore normalcy to an environment in which one HFT strategy trades almost exclusively with another one, in the process adversely impacting the increasingly fewer number of non-algo based traders, is by such a measure as transaction taxation. At the end of the day, we suspect the cost from a Tobin tax will be materially lower than the highlighted HFT toll payments discussed above, especially in a variant that does not impact day trading enthusiasts.

To be sure, a Tobin equivalent is not the only way to remove all the adverse HFT baggage accumulated over the years. Another proposal includes the periodic (instead of continuous) clearing of trades. As periodic clearing eliminates the possibility off line-jumping by predatory and block sniffing algorithms due to all trades clearing all at once at a set interval, this would be a comparably viable approach to eliminating the parasitic features of HFT. Yet with the governmental financial windfall associated with a Tobin tax, we believe the political agenda will be much more focused on the Tobin proposal. Yet if that were to encounted substantial populist and Wall Street lobbyist resistance, periodic clearing is precisely what Senator Kaufman should be espousing as the way to fix the computerized mess that US capital markets have become.

Full QSG report attached.

 

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Sun, 11/29/2009 - 14:51 | 145437 anynonmous
anynonmous's picture

and from conspiracy corner - the latest from Bob Chapman

The following information may be the most important we have ever published. One of our Intel sources, highly placed in banking circles, tells us that on 1/1/10 all banks that have received TARP funds have been informed by the Federal Reserve that they must further restrict any commercial lending. Loans have to be 75% collateralized, 50% of which has to be in cash, which is a compensating balance....

http://theinternationalforecaster.com/International_Forecaster_Weekly/Po...

 

Sun, 11/29/2009 - 14:56 | 145439 Anonymous
Anonymous's picture

and then every company that is listed will try to sell obligations and that will be follow by a obligation crash follow by yet another credit crunchy for breakfast.

Spooky.

That is my que to start shorting the markets.
Thx for the info!

Sun, 11/29/2009 - 16:19 | 145488 Ivanovich
Ivanovich's picture

Uh, really now.

Sun, 11/29/2009 - 16:39 | 145503 Anonymous
Anonymous's picture

I read it, now I can sleeep better.

Sun, 11/29/2009 - 14:58 | 145440 Anonymous
Anonymous's picture

REDACTION : All my chinese funds seem the be down 10% since friday, could you investigate that?
It seems that the dubai fears have made it into those funds.

Sun, 11/29/2009 - 15:16 | 145454 Anonymous
Anonymous's picture

Tobin Tax Proponents are ignoring the ease at which the HFTers will bypass the tax by moving off shore or procuring loopholes in the law. Give me a freaking break.

Sun, 11/29/2009 - 17:34 | 145547 Anonymous
Anonymous's picture

if the tax is levied at source (i.e. US venue where the trade is done) it does not matter if the executor of that trade is off-shore.

India for example has myriad taxes on transactions (stamp duty/sebi duties/service tax/security transaction tax etc) all levied at source. None of that has destroyed Indian market.

Sun, 11/29/2009 - 17:48 | 145561 jdun
jdun's picture

No kidding. The only thing it does it line the pocket of government which is something we don't need. Less government, less tax, better country.

 

Tax always hurt the poor and middle class. It does little against the rich. All they have to do is move to another country.

 

If you want to stop HFT outright ban it and it something I support. Hower I do not support tax in whatever form.

Sun, 11/29/2009 - 18:57 | 145600 Anonymous
Anonymous's picture

Bingo! There are other ways to address HFT. HFT is merely a red herring to institute an enormous and capital destroying tax on US investors. The government just wants the money and this is a convenient excuse and one that will likely screw every market participant except GS.

(Funny how it works that way)

Sun, 11/29/2009 - 15:18 | 145455 Anonymous
Anonymous's picture

This is an interesting report....

There only need to be a few rules....

1) all orders stand two second minimum

2) the exchanges have to be defragmented into a singular direct access electronic exchange....

3) first come.....first served

4) no account minimum ....no day trading size restriction

5) simple 4:1 margin...applies to both intraday and overnight....

6) no dark pools or internal order matching....all transactions have to occur on the exchange....

7) upper size restrictions per account

8) no uptick rule....shares are electronically tagged
and cannot exceed outstanding shares....no locates required....

9) applies to all securities classes....stocks...bonds....commodities....forex....

10) securities information.....fact based only....wiki format....

11) Universal access....in the language/currency of choice

12) no taxes of any kind on any securities....in the name of efficient capital ....

13) transaction costs have to be the same for all transactions....20 cents per hundred units....removes trading advantage biase....

This solves the HFT issue....

Mon, 11/30/2009 - 04:07 | 145994 Anonymous
Anonymous's picture

The upper hand that a fast algos give will not be mitigated AT ALL by your simplistic "solutions".

"First come, first served": Who do you think will be? You and your big fucking brains, or that boatload of computers standing right next to the actual stock market box? And what the fuck does "stand in 2 seconds minimum" have to do with anything, given that you also say "first come, first served"?

Sun, 11/29/2009 - 15:31 | 145466 AN0NYM0US
Sun, 11/29/2009 - 16:04 | 145481 Anonymous
Anonymous's picture

that clears that up.

Mon, 11/30/2009 - 00:09 | 145844 onelight
onelight's picture

more manufactured news that is really non-news..

bread and circuses for the bored sheeple..

why Tiger even has to say anything is an affront to everyone's intelligence and dignity as human beings..

who cares what their personal business may or may not be...and being a public figure does not change that..

seriously, it's like TMZ and the rest are working to turn everyone into a cynical pseudo-moralist, seeking to know who might have failed at anything at all

where does it end?

1984 except the inmates think they are in charge..

the craven, celebrity-stalking media sells eyeballs to advertisers, and first they have to aggregate them with whatever prurient hook will distract them from whatever more real thing they might be doing...

 

 

Sun, 11/29/2009 - 15:45 | 145470 aint no fortuna...
aint no fortunate son's picture

Speaking of taxes, I have a dumb question. Do the institutions have the same tax reporting requirements as retail traders; ie., do they have to report short term gains/losses the same way we do? 

If so, how do the Goldmans compute wash sales on easily half a billion or more trades a year, covering a total of maybe 50 billion shares actually traded... many of which become odd lots and get carved up due to iceberging etc, and then the iceberged stuff gets iceberged, etc etc to virtual infinity?

I go back to my original thought from two weeks ago... wouldn't it just be better to cut out the middle man, do away with the IRS, and send our returns and payments direct to Goldman? I mean, they must be more expert at figuring taxes than the IRS. If they actually pay their rightful taxes that is...

 

Sun, 11/29/2009 - 16:17 | 145487 peterpeter
peterpeter's picture

There are no wash sale reporting requirements if a mark-to-market election is made, which essentially means that all trades are accounted for as short term gains (and taxed as such).

With wash sales, the dis-allowed loss doesn't get thrown out - it just gets put into the next basis calculation for the next purchase/sale of the same equity - so if everything is being accounted for as a short term capital gain (or loss), then the effect of the wash sale rule is 100% neutral (disallowed losses under the wash sale rule would lower the next cost basis giving you back the same money as never having applied the wash sale rule).

So... things are actually much easier to account for.  You just need to itemize for each asset traded the total proceeds and total costs of proceeds, as your business revenue and costs of revenue lines, and then pay short term capital gains tax on the difference between the 2.

Non-corporations can also file with the IRS for a "mark to market election", which would absolve them of having to compute wash sales, but would mean that any long term capital gains treatment would go out the door... so it only makes sense for individuals who have chosen to trade frequently on a short term basis, have not incorporated a trading business to host their activities, and who do not have and will not in the future have long term capital gains.

Sun, 11/29/2009 - 18:06 | 145572 aint no fortuna...
aint no fortunate son's picture

Thanks peterpeter... in a few paragraphs you explained everything clearly, concisely, perfectly, even answered additional questions I had but didn't ask. Much appreciated.

Sun, 11/29/2009 - 18:23 | 145580 spekulatn
spekulatn's picture

Well done, peterpeter. Great stuff. 

Sun, 11/29/2009 - 15:45 | 145471 Anonymous
Anonymous's picture

"What's the frequency, Lloydeth?" is your Benzedrine, uh-huh

Sun, 11/29/2009 - 15:46 | 145472 Anonymous
Anonymous's picture

The reason small traders are the most vocal about the transaction tax is because as it is currently proposed, they will all be out of work....scalpers, day traders, swing traders. There is no doubt algo trading is a giant scam/mess. How do we reform that without killing the little guy. The tax as it is now proposed will make all short term trading unprofitable unless you have a computer driven system that generates 90% plus winners. Hmmmm....sounds like the Vampire Squid will be fine. The rest of us unemployed.

Sun, 11/29/2009 - 17:14 | 145529 Mark Beck
Mark Beck's picture

IMHO, increasing trading overhead through a tax is the worse way to regulate.

I pay taxes, I fund the SEC, they just need to do their job, investigate the allegations and regulate. It is clear there are only a certain number of market makers, with the required access; market, customers, equipment, and exchange. To permit high activity at near zero cost relative to what may be charged for a customer trade. The overall system has to be in place for clearing trades. It is how the system is used which is in question.

For Government to add a tax, to an open market to encourage broker behavior already under the jurisdiction of a Government agency (SEC), sounds crazy to me.

Mark Beck

Sun, 11/29/2009 - 16:19 | 145483 heatbarrier
heatbarrier's picture

"Deterrence is the art of producing in the mind of the machines the FEAR to trade. A Tobin tax is terrifying and simple to understand, completely credible and convincing." -Dr. Strangelove

http://www.youtube.com/watch?v=cmCKJi3CKGE

Sun, 11/29/2009 - 16:34 | 145497 Anonymous
Anonymous's picture

What is more important to understandf is that the only people in Japan that have made any money since the all time high....ie 29 years ago....have had to become traders....

Try this...

Take out a bond calculator...

Place in a 30 year 3% bond at par....change the rate to 7,8,9 %....

The value plummets ....even from our current levels....
COULD plummet 70% +....

The other reason is that the baby boomers have no savings....and even if they did ....there would be no reward....ie a 3% long bond paying $30 per $1000 per year ???? Not going to cut it....

Furthermore any form of transaction tax would make an already weak market....much weaker...

And the bid ask spread on many stocks would widen from a few cents to over a dollar....and even more....It would cost about 5% for most to transact a stock to break even.... This would be more than what a bonds pays for a year....

Low rates are here to stay....just like Japan....they sacrificed the retirements of their old people to try to save the youthful future....The SAME is happening in the US....

The US stock market....or any stock market needs rules that make for a level playing field and efficient capital.....as mentioned above...

All securities capital should not be taxed in any form....in the name of efficiency....

The legal largess headwinds also should be dramatically reduced.....

And because of government imposed low rates.....

EVERYONE HAS TO BECOME A TRADER....

WE ARE ALL NOW TRADERS....

And by the way....one buys real estate when rates are high...not low....EVERYONE buying at a 0% interest rate impostion is going to get smoked....

You know it...

The best the government can do is to make TRADING smooth sailing....

Because that is it folks.....

And the market needs billions of small accounts with diverse opinions....not a handful of managers who will need to exit at once....

You know it....

Sun, 11/29/2009 - 16:36 | 145502 peterpeter
peterpeter's picture

> A critical observation of who is trading with whom now that HFT accounts for 70% of trades: the conclusion is surprising in its simplicity: at least 20% of the incremental order flow (over 50%) has nothing to do with providing liquidity, thereby refuting all claims that HFT is purely an altruistic strategy seeking merely to benefit all market participants. If that was the case HFT would max out and plateau at 50%.

Oy!  This is what happens when people throw around numbers that are not well grounded, and then which they don't understand.

The 70% figure from TABB (which I think is questionable at best) means that 70% of transactions included a HFT on ONE SIDE of the trade.  That means that if TABB had meant to say that *all* trades are done by HFT with a HFT bid hitting a HFT ask, the reported figure would have been 200%.

You are taking a poorly constructed figure from Larry Tabb that was inflated to be more impressive sounding (by counting any transaction that had a HFT fingerprint on either the sell or buy side or both), and making an erroneous conclusion from it.

Of course, some HFT is trading with other HFT some of the time - but for each such trade, I posit that it is not possible for both parties to make money (when viewed on a statistically meaningful sample size).  Further, I posit that it would not be possible again over a statistically meaningful sample size of transactions with HFT on both sides of the trade for the 2 institutions to have combined made a net profit.

Ergo - the volume of HFT is self limiting, unless the software is modified to become more charitable.

As for the rest of the article, it made my stomach churn a bit.  How many ways are there to mis-interpret data?  If you look at the adverse selection of large institutional traders and measure their implementation shortfall without attempting to quantify the spread impact of the HFTs (i.e. compared to human market makers), as well as the lower SEC+NSCC+FINRA+exchange fees - then you have only looked at the costs rather than the reduction in costs.

And regarding the nonsense about sub-$10 stocks trading more frequently - when in history has it not been the case that a lower stock price means increased volume?  Do you expect to see BRK.A trade as frequently as BRK.B?  Crap - companies have been doing stock splits for decades, in an effort to make their shares more affordable, so that non-odd-lot orders (i.e. 100 shares or multiples of 100) are reasonably priced for retail investors.  If someone is willing to commit $25K to a purchase, the number of shares traded is obviously inverse to the price...

> [so yeah, all it takes is an i7 and a $29.95/month program to run a HFT system, right]. The time frames under consideration are so short that many of these firms have taken the step to co-locate their technology inside the buildings housing the exchanges.

A dual quad core i7 with sufficient memory from the likes of Dell (cost just under $10K for 2 2.93GHz processors and 24GB of memory) will do just fine.  A really good programmer could probably get by with a single processor and save $3K.

The data feed will need to be better, but there are many cheap brokers who will get you L2 data feeds perhaps ~2ms behind co-located servers with as little as $25K in your trading account.

It is not the cost that is out of reach of most people, but the ability to construct a trading strategy that works and build an efficient implementation.  Anyone who claims it takes millions of dollars is either trying to thwart additional competition through scare tactics, or is simply ignorant.

 

Sun, 11/29/2009 - 18:59 | 145601 Tyler Durden
Tyler Durden's picture

While you keep claiming that factual data presented by Tabb, or any other data source that disagrees with you is irrelevant, Zero Hedge readers keep waiting for you to demonstrate some/any opposing data as opposed to merely opinions. 

Also, for those interested, here is the draft price sheet for the NYSE Mahwah collocation costs: the monthly prices for a full bundle of HFT services add up to the millions per year. And yes, you do need the a bundled package otherwise there is no point in even presuming one is competitive with the upper tier of those who have monopolized the HFT process.

Normal 0 false false false EN-US X-NONE X-NONE Normal 0 false false false EN-US X-NONE X-NONE

 

Mahwah Price Sheet - DRAFT 
08/11/09

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1
Gbps Circuit Prices - 3 Yr Term

 

 

 

 

 

Service

Monthly
Price

 

 

 

 

SFTI
IP

 $                2,500

 

 

 

 

SFTI
LCN

 $                7,500

 

 

 

 

SFTI
Optic*

 $                1,250

 

 

 

 

Two
of Each

 $              22,500

 

 

 

 

 

 

 

 

 

10
Gbps Circuit Prices - 3 Yr Term

 

 

 

 

 

Service

Monthly
Price

 

 

 

 

SFTI
IP

 $              10,000

 

 

 

 

SFTI
LCN

 $              20,000

 

 

 

 

SFTI
Optic - 1st and 2nd Ckt*^

 $                1,700

 

 

 

 

SFTI
Optic - Additional Ckts*

 $                6,250

 

 

 

 

Two
of Each

 $              63,400

 

 

 

 

 

 

 

 

 

SFTI
6 Packs
- 3 Yr Term

 

 

 

 

 

Service

Monthly
Price

 

 

 

 

SFTI
1G Bundle*

 $              18,000

 

 

 

 

SFTI
10G Bundle*

 $              60,000

 

 

 

 

 

 

 

 

 

 

* Cross connect charges at Access Centers are not included
in SFTI Optic prices.

 

 

 

 

 

^ Customers can only order two (2) SFTI Optic circuits at
this price

 

 

 

 

 

A SFTI 6 pack is six (6) circuits, two (2) of each type
of circuit (i.e., SFTI IP, SFTI LCN and SFTI Optic) all at either 1 or 10
Gbps.

 

 

 

 

 

One Time Charges are still to be determined

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

General: The pricing is based on kW and
ranges from $1200/kW/month down to $900 / kW/ month depending on the number
of cabinets.

             

Reservation Pricing:  A
one time per cabinet rate:  $10,000 for a 4kW  cabinet and
$20,000 for an 8kW cabinet  will apply. Monies will be deposited in a
trust account and will be applied to the customers first bill in 2010.

                         

Member Tiered pricing schedule:

                     

First 2 cabinets for members:

         

Standard density cabinet at 4kW for $4,800 per month

         

High-density cabinet at 8kW for $9,600 per month

         

Cabinets 3-5 for members:

         

Standard density cabinet at 4kW for $4,200 per month

         

High-density cabinet at 8kW for $8,400 per month

         

Cabinets 6-10 for members:

         

Standard density cabinet at 4kW for $3,800 per month

         

High-density  cabinet at 8kW for $7,600 per month

         

Cabinets 10+ for members:

         

Standard density cabinet at 4kW for $3,600 per month

         

High-density  cabinet at 8kW for $7,200 per month

         

A one time fee of $5,000 per cabinet will also apply.

                     

Notes:

                     

1.       Pricing reflected
is for firms (members) that have trading permits with the various NYSE
markets.

               

2.     Discounting follows a tiered
structure and is based on cabinet volumes. Discounting starts with cabinets 3
through 5.

Sun, 11/29/2009 - 20:09 | 145651 Zippyin Annapolis
Zippyin Annapolis's picture

HFT like GETCO are to Mahwah as love potion #9 is to Elliott Spitzer--a match made in lustful heaven.

Sun, 11/29/2009 - 16:46 | 145511 peterpeter
peterpeter's picture

>  As periodic clearing eliminates the possibility off line-jumping by predatory and block sniffing algorithms due to all trades clearing all at once at a set interval, this would be a comparably viable approach to eliminating the parasitic features of HFT.

And so would keeping all trading in dark pools....

Or maybe we should just get rid of the computers and use a telephone and go back to a ticker tape.  Those glass jars were kind of cool looking.

Maybe we should just save retail investors the most money and shut down the mutual fund business (which is the largest contributor to any predatory HFT), and save small time investors from having to pay ridiculous fees to fund managers who on average perform worse than a broad index ETF like SPY.

 

Mon, 11/30/2009 - 06:08 | 146028 gatopeich
gatopeich's picture

Yeah p-p, you already made it clear you are on the 'hard earning' side of HFT trading.

Sun, 11/29/2009 - 16:52 | 145515 Anonymous
Anonymous's picture

Peterpeter is on to something. Remember when Nasd added the sale volume to the buy volume of a trade while the NYSE counted the volume of the trade to get to daily volume. It is the strategy where we all fall down, buy low sell high, free beer tomorrow

Sun, 11/29/2009 - 17:11 | 145527 overbet
overbet's picture

I have read that just one high frequency trader can flip 15 to 20 million shares a day. 15 million * .0024 liquidity rebate per share per trader per day is $36,000. a day with very little risk. They can send out up to 1000 orders a second. If they are sending orders on 1000 symbols with 1000 share lots and the average stock price is $20.00 a share thats a lot of money on the line that could potentially go up in smoke if something went haywire. The speculation is that high and ultra high frequency trading is going to quintuple from here. That many traders sending that many orders is dangerous. They have already started to do different strategies besides liquidity providing for rebate. They are now speculating in stat arb just as much as liquidity providing. Which basically means they are getting more aggressive and taking more risk. It is no longer primarily risk free exchange or ecn arbitrage.

The state of the market as I see it is that you must be a good stock picker or you should invest your money in a business of your own or speculate in real estate. The market pirates are just going to tax the fuck out of every dollar you put into the market and kick a little back to the politicians and regulatory bodies. Instead, dont put your money in the market and kick them back yourself. They are gonna get your money one way to another why not get some representation for it. 

Brokers prop desks, HFT, and anyone else who will pay the exchanges can get away with this: See order flow before other market participants. Front run others orders. Place hidden limit orders so there is no transparency to what the real market is. They can game dark pools. Detect or maybe even see buyers or sellers orders and discretionary limits and front run them and then unload to them at a profit for themselves and i am sure there are many many many other things. I mean come on Dark Pools are to remove transparency, how do they get away with letting them exist? Another joke is that the HFTs are defending their profits which are clearly a  form of market taxation by saying they step in and provide liquidity in the Fall/Winter of 2008. Whenever, I try to hit their bids they disappear. It is basically a savvy way to legally steal. If the market is falling like a rock they expect us to believe they are gonna step in like heros and hold it up? We all know they would be shorting the market instead or they wouldbnt be profitable traders. We know they are profitable. I am steaming now I need to meditate. This shit fires fires me up. I need to breathe slowly.

We should make a list of all of the corrupt day to day market activity that is being allowed to happen that is clearly wrong, every little and big thing. I would like to see the total number of wrong doings that are legal. Seriously, why do we even have the SEC? Just get rid of them and give their budget money back to Obama so he can make it rain somewhere. I cant imagine people losing less money because of market corruption if there was no SEC yet that is why they exist. Actually i bet the amount of money investors lose to corruption would be significantly less if there was no SEC because they would be forced to do their own due diligence or not play. The brokers would have to prove to them the game was legit instead of having a government agency give it the seal of approval. People have been conditioned to trust government agencies like the FDA they are supposed to be the standard setters. When the SEC says this or that is okay the public thinks oh it must be fine. When in reality some things the SEC is supposed to regulate and they dont even understand how they work themselves.  I am convinced that the SEC only exist to protect brokers and professional market participants from the inquiring public while trying to appear like they are protecting the public. Where is the "Fair and Orderly" or is that just cheap talk? 

 

Sun, 11/29/2009 - 17:20 | 145533 overbet
overbet's picture

If  you want to know a lot about HFT read all of these articles and you will have a good understanding. HFT is okay imo if that just means sending many orders at once to employ a stratgey. Co-location, naked access, front running, dark pools and other hidden orders are not okay.

http://www.advancedtrading.com/issues/200911/index.jhtml;jsessionid=0P4V...

Sun, 11/29/2009 - 17:29 | 145541 Anonymous
Anonymous's picture

There is one certain outcome to this tax: No
short term traders will be able to avercome this. This will amount to a 100% tax for 1000's of people.

Sun, 11/29/2009 - 17:49 | 145562 Anonymous
Anonymous's picture

Spent some time reading the documents in question. I think there is a lot to be criticitze in the QSG report.

First of all, their stock sample seems to be pretty skewed. If I understand the tables on page 6 correctly, the number of trades per second in stocks for the arrival algo is around 1 per second, whereas the number of trades per second in stocks for the vwap algo is around 0.3 per second.

These are not unbiased samples of high liquidity stocks. They are lower liquidity stocks, meaningfully segregated by order type (to the advantage of trying to make the author's points).

Second, the vwaps are 4 hours... vs. 20 min for the arrival algo. It is hardly surprising that (since these orders presumably have alpha) long duration orders have greater implementation shortfalls (measured from arrival price) than short duration orders.

So, we've learned that it is better to trade quicker when you have alpha that realizes over your trading period. And that trading low liquidity stocks is more expensive than trading high liquidity stocks. Sigh.

Sun, 11/29/2009 - 19:23 | 145618 Cistercian
Cistercian's picture

 Let us dispense with half measures:let's ban HFT outright.I can't for the life of me see a benefit...except to people who like using a money siphon on the market.

 

 I must add that I doubt the veracity of those who support HFT as it is currently implemented/abused.Too much to gain at the expense of literally everyone else.

 I would GLADLY have a slightly less "efficient" market that was not simply a criminal enterprise.And for perspective on this view, I also think banking should be boring..as opposed to a high stakes casino.You know, loaning money using boring actuarial tables, requiring actual collateral....and not originating sewage loans to be bundled into derivatives only to explode like an atom bomb in the future.Obviously, I live in a trite fantasy world where ethics actually matter in combination with business practice.

Sun, 11/29/2009 - 19:51 | 145639 KidDynamite
KidDynamite's picture

TD - VWAP is an excuse for the BUY SIDE - not a tool of the sell side.  I agree it's absurd to execute at VWAP - after all - if a firm is executing at VWAP, wtf are they paying a trader for?  the PM could enter the order directly.  VWAP is used by buyside traders to avoid accountability - plain and simple

as for the impact of a Tobin Tax - it's tough to estimate, because the Law of Unintended Consequences will insure that liquidity and trading volumes post Tobin Tax will be vastly different than we likely think, but it seems to me that the comparison is simple: you take the money that the HFT guys who would be virtually eliminated by such a tax are currently making (these would be market improvements - SAVINGS, as you'd say), and compare that to the increased cost of trading as a result of wider bid/ask spreads when liquidity diminishes (Which is difficult, but far from impossible to calculate/estimate).. .ie, notional $trading volume per year x increase in bid/ask spread on average

Sun, 11/29/2009 - 20:22 | 145655 Zippyin Annapolis
Zippyin Annapolis's picture

well--

Sun, 11/29/2009 - 20:16 | 145663 Zippyin Annapolis
Zippyin Annapolis's picture

Custom algos are meant to throw chaff at the HFT programs that are sniffing the buy side order flow--think Star Wars--this is all evolving and gross generalizations are just -well- gross.

Sun, 11/29/2009 - 20:59 | 145689 Anonymous
Anonymous's picture

A transaction tax puts thousands of us out of business. So it is a 100% tax like the previous commenter suggested.

This is the same as saying I am going to take your job whether you like it or not.

And we had nothing to do with subprime or HFT.

And there are no other similar jobs to go to for us.

Tell you what, considering how ratings agencies, politicians, and the large IBs are intertwined with the SEC and politics, just mark another one down for the small guy, who got clocked for no reason, putting their livelihoods and families on the street.

Just mark me an Expat for sure.

The US is just not what it used to be.

Too much corruption, fascism, and lack of freedom, and soon to be much higher taxes.

The US is going down the tube faster and faster.

What the markets really need are millions of accounts like us that have varied opinions. Just having a handful of big players that are going to need to get in and out at similar times do not make for a complete marketplace.

USA = Good Riddance

I think that the exchanges are going to be more non US centralized anyway just because of the higher taxes to come.

Switzerland, Singapore, and Hong Kong are going to be far more efficient to operate from.

Why would anyone want to have to pay 50 cents to produce a $1 in income, when one can trade in any one of the three countries and pay 10 cents to make a dollar ? It is really as simple as that.

The US Exchanges are "gone" anyway , just on this alone.

Securities are a homogeneous product, and computer banks can be anywhere.

Good riddance.

Mon, 11/30/2009 - 04:54 | 146010 Anonymous
Anonymous's picture

What is your line of work, may I ask??

And you know what? A couple of thousands out of work to fix the place for several hundred millions? **I DO NOT GIVE A FLYING FUCKTARD.**

Moron.

Mon, 11/30/2009 - 06:38 | 146040 gatopeich
gatopeich's picture

Re. "A transaction tax puts thousands of us out of business.":

I have the feeling that HFT is already putting small traders out of business, and probably out of their money. Probably only a matter of realization here.

Excuse my non-tradergroupthink, but I can't easily imagine how a tax in the order of 0.1% would really hurt a human trader. Unless he/she is doing roughly the same as HFT (on a lesser scale).

While blaming others for corruption, fascism, and lack of freedom in the US, could you explain how scalpel-wielding day traders are 'fighting back'?

And good luck with your 'dissimilar' job!

 

Mon, 11/30/2009 - 17:04 | 146683 Anonymous
Anonymous's picture

Hear, hear! I so wholeheartedly agree to this point - I just had to say it!

(ZH: Thumbs up/down buttons on comments? And articles to, for that matter?)

Sun, 11/29/2009 - 21:14 | 145698 Anonymous
Anonymous's picture

In order to be more meaningful....one needs to understand where we used to be and where we are today in terms of total execution costs.

Let's take 1978 in a typical Merrill Lynch office.
One could view the pneumatic tape on the wall....and walk over to the Quotron and get single quotes. There was no internet. When one wanted to buy, one would ask the broker to write a paper ticket, and if one bought market the market makers would kindly take the spread which was commonly 50 cents or more.....and the commission for a 1000 shares was a few hundred bucks...

Today, because of ECNs, the spread is now pennies, and the commission for 1000 shares could be largely rebated to nothing via competing ECNs....

Now Congressmen who have never traded a share of stock want to direct how the exchange should be run and taxed.

I think that says enough.

Wed, 01/20/2010 - 13:19 | 199447 Anonymous
Anonymous's picture

This is THE MOST important point here.

I'm sorry if you are a click execution trader and use your mouse to trade shares. At the end of the day, your services are no longer needed, and your execution strategies are incredibly inefficient. The reason you pay more for slippage is because market information is now more efficiently processed (by HFT algorithms) to price in the actual market impact of your trade - tick by tick. If you can't handle that, I'm sorry.

Markets have always been PREDATORY. A "predatory algorithm" is no worse than an "opportunistic trader" who sees movement in the market and is quick to jump on it. This has always been a factor in the micro market structure, and now because humans are no longer competitive, they are pissed that they are being beaten at their own game. Want to make money? Don't trade on a short time frame - stat arb only works so well. You can still make money trading on fundamentals - if you are smart.

The amount of garbage spewed on zerohedge about this stuff is absurd. The worst part is, now that it has so many viewers, its not like its authors can ever admit that they are wrong. I mean, why would they? They probably have more viewership than they ever did before!

All of these "nails on the coffin" are examples of idiot traders placing orders that will obviously get sniped, because they are incredibly unsophisticated. Not to mention, the bottom line is that SPREADS decrease - which means that the INCREMENTAL market pricing is more efficient - it does not mean that the market will be dumb and digest your order with less slippage. Although, I wouldn't expect anyone to think for themselves on this blog, because they are clearly to busy refuting people's legitimate claims in all caps and substituting profanity for any sort of coherent arguement. Nice work.

Sun, 11/29/2009 - 21:39 | 145713 Anonymous
Anonymous's picture

This is soooo simple.

Ban HFT, but no taxes. Define it as one cannot trade
over 100x per minute, and the order has to be good for two seconds.

Done.

One wants to tax capital in a depression ?

Sun, 11/29/2009 - 22:01 | 145730 Anonymous
Anonymous's picture

The IMF Is Not Considering The Tobin Tax

http://www.bt.com.bn/en/business-world/2009/11/10/imf-exploring-insuranc...

If the US polys want to go it alone,

Then bye bye US Exchanges.

Mon, 11/30/2009 - 04:53 | 146008 Anonymous
Anonymous's picture

No, they're apparently considering a plain Pay The Government More Money tax - to help pay for cleanup and .. you know .. the general mess you citizens make.

Such a tax, if I understand you bunch of morons on this comment board, is bad.

Instead one could pursue a tax that took the bull directly at its horns - killing off the entire situation with a tax that was utterly and fully directed at *THE PROBLEM*, not towards the necessary band-aids that one'll need later. A normal person, a normal company, a normal WHAT-THE-FUCK-EVER, would not feel such a tax AT ALL.

**AT FUCKING ALL.**

But it would *KILL* those shops whose sole means of making money is the pretty-much gratis access to putting unlimited amounts of orders on the market, so that THEY in effect can levy a tax on ALL ORDERS that go through the system.

Ah - THERE I get it - YOU ARE ALL FOR PRIVATE GOVERNMENT!! Companies should be able to levy taxes on .. ALL OF US! WHATEVER IT TAKES, as long as we can kill the *actual* government!!

Most (apparently more than 50%, judging by the vote) of the folks on this board have a HUGE short-cut on their internal logic board. Please fix this.

Mon, 11/30/2009 - 00:58 | 145894 Anonymous
Anonymous's picture

Even though we are taking a leap of faith with the “QSG T-Cost Pro tick-based cost attribution technique” (whatever the heck that is) this paper puts some real data behind the hypothesis (some of us had) that many off the shelf algos aren’t so light on their feet and at worst hand “the keys of the kingdom to whoever is in charge of the primary child order splitting algorithm.”

But how do we know exactly that HFT is “adversely impacting the increasingly fewer number of non-algo based traders” ??

HFT isn’t constantly driving prices up or constantly driving them down and periods of constant up and down (volatility) can be taken advantage of. Even Goldman’s stat-arb desk can’t anticipate the stubbornness and whimsy of a human trader or PM who just doesn’t feel like paying more than a quarter today. One large, stick-to-your-guns, found-the-other-side cross – over the phone or in a dark pool, can trump a whole slew of trades that under or over tracked by 5bps. If HFT exploits the algos you use and drives up your costs, don’t use those algos anymore, write your own or drop them altogether, don’t ask the government to level the field with taxes. Good grief (here's the gun Big Hoss just don't point it at me!)

Trade cost analysis is almost entirely a function of buy-side compliance hassle avoidance. What started as a means to justify that you weren’t sending business to Dewy, Cheatum & Howe simply because of the steaks and the strippers quickly turned into micromanaging busywork that had the net result of missing the forest for the trees. The true, total cost of a trade, however you measure that, is already baked into the performance of the underlying portfolio which is very much a stark naked, transparent and well noticed number. When traders are more concerned about making compliance happy than making their PMs happy or focusing on the bigger picture, the head trader or some committee eventually picks some VWAPy type metric to measure all trades by because it’s easy to understand and makes a certain amount of sense. As a bonus, after thinking about it for five minutes there turns out to be some plausibly deniable way for you (the trader) to tweak the workflow or compliance laden order management system to your advantage every now and again to give yourself a VWAP head start. So now the trader is focused on keeping compliance happy and trying to game the system. Terrific. And hey, these algo things are cheap and easy! But guess who else is gaming the system? – the guys who wrote or at least better understand those algos and can figure out how to turn small, regular waves into exploitable momentum. Total execution cost was probably lower for the buy side when everything was done by phone at 6c/share with three times the traders.

Mon, 11/30/2009 - 04:24 | 146000 Anonymous
Anonymous's picture

It is so "funny" reading all your reflex responses to "one more tax".

What the fuck is wrong with you Americans?

What would you want, really? You repeatedly whine that you don't want more government, that "taxes are lining the governments pockets", "less government" etc etc etc.

What do you want? Pure anarchy? Do you REALLY believe that would be good? What about the fact that people actually ARE differently equipped from birth, and that your country, AFAIK, not yet has started to kill people failing to achieve some specific limit on IQ tests and similar. So what do you want to do about it? Have you ever thought such thoughts, EVER?

My god, you folks are so retarded. So god damn retarded. Oh my. You are probably the same fucking morons that come up with the interesting idea that global warming is something that scientists have come up with to "get more money". It is SO FUCKING RETARDED I have problems relating how I feel about it.

BUT, I digress: Here's my real point: This tax would not be to "line governments pockets", but PURELY as a dis-incentive to place HFT orders. If one single PLACEMENT of an order had a tax of e.g. 50 cents, then "thousands of orders per second" would at least COST something. One would have to believe that ones order could extract MORE than those 50 cents. Placing orders just to probe the market would suddenly be dear.

Moving off-shore wouldn't help jack - as if you wanted to trade on American companies, you'd have to do it on the American stock exchanges - and you'd get the tax.

If ALL companies moved their stocks to off-shore stock exchanges, then you'd have a problem. But that won't happen. a) It just won't, but b) those other venues would then have to allow HFT - which, logically, basically was banned "back home" because it HURT THE INVESTOR. Why the FUCK do you think the companies would want to hurt THEIR INVESTORS?

"Raping the middle class" arguments: AS IF the *middle class* makes thousands of order per .. any fucking time unit you can come up with, up to and including "during their fucking lifetime". So just how much would this tax hurt the middle class? Take your vested bullshit arguments and just fuck off.

It boils down to the fact that IF you go into the stock market, you should believe that the stocks you trade in have an ACTUAL momentum somewhere, over a time span of more than milliseconds. Because if you don't, you will be killed by the tax. If you actually buy stocks because you believe in the company or whatever, thus having a time frame of at least some minutes, then this tax will just hit you AT ALL - it will pretty much cease to exist.

Mon, 11/30/2009 - 11:02 | 146175 Anonymous
Anonymous's picture

Uh...actually it looks like some very significant part of global warming is in fact something that scientists have come up with to "get more money".... best analysis here:
http://finemrespice.com/node/71

Mon, 11/30/2009 - 15:54 | 146547 meritocracy
meritocracy's picture

I think that the Tobin tax would be disastrous and that parts of HFT should be eliminated. I believe the Tobin tax would raise a lot less revenue than anticipated as volumes would be decimated as well as the capital gains taxes. Also, everyone already pays the SEC fee on all stock sales, which is significant for daytraders and high frequency traders.

There are better ways to eliminate the unfair aspects of HFT.

1. Charge a fee if an order is cancelled within 30 seconds of order submission unless the order would be at or better than the NBBO.
2. Charge a fee if you submit more than 100 orders per filled order
3. Ban internalization of orders by brokers
4. Ban payment for order flow
5. Get rid of predatory price matching/front running by respecting first come/first served order handling at each price level for displayed orders.

Institutions can also do a much better job by hiring professional traders for execution, rather than outsourcing the job to VWAP and other algos. If they must outsource execution to VWAP and other algos, they should at least have the sense to not go to firms that engage in principal transactions as these firms have a major conflict of interest.

Dark pools should also be subject to more regulatory scrutiny. The orders are known to the firm running the dark pool. The question is, is this order flow info used for the benefit of the firm's own principal trading or is there a strict Chinese wall in place? The Getco dark pool seems shady in this regard.

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