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Apple and the risks of trading 29,000 times per second

tech.fortune.cnn.com

31–40 of 48 posts

Re: Apple and the risks of trading 29,000 times per second

#31
post #29

My fear as a pessimistic engineer is that unless there is more regulation of HFT, sooner or later someone big (a bank, an exchange, a country) is going to be financially wiped out by a HFT-gone-bad incident, and the resulting mess will take years to unravel while everyone else (pension funds, private investments, etc.) gets to suffer for the sins of their masters. I propose an exponentially decaying tax on trades - t…

> I propose an exponentially decaying tax on trades - the longer you hold a purchase, the less you pay when you sell it. If you WANT to trade at sub-microsecond levels, you can bloody well pay for the clean-up fund when your system goes bad.

It seems like any tax on trades at all (even a fixed tiny percentage per trade) would go a long way toward reducing HFT.

Re: Apple and the risks of trading 29,000 times per second

#32
post #6

"In 2011, BATS accounted for more than one in 10 U.S. stock trades, processing an average of 29,000 trades per second. Against that kind of computer power, retail investors don't stand a chance." Correct me if I'm wrong, but isn't BATS an exchange? Why are retail investors "competing" against the exchange? Is the solution some sort of paper and pencil exchange? Or maybe we can go back to jumping up and down and flapp…

Retail 'investors' shouldn't have any issue with BATS if anything BATS provides liquidity, however retail 'traders' stand no chance because the computer is far better at technical analysis and pattern matching than the average trader. Retail traders never really stood a chance against institutions because retail trades the market rather than creating it like institutions do. eg. A retailer can't execute a short squee…

No one needs 29,000 trades a second liquidity. HFT serves no market making function. It is a drag on market operations and confidence.

Re: Apple and the risks of trading 29,000 times per second

#34
Tom Clancy predicted this kind of thing years ago. Although in his story the catalyst was a foreign power messing with the system. Once things got rolling the automated systems went with it to the point of the whole system crashing. Clancy wrote it so that a retired money guy had to explain to the people in charge what really happened because they were clueless on how the system actually worked. The solution was to simply reset the clock back to what was before the problems began and they pretended it never happened. Some of the discussion on the economy and trading were really interesting in that book.

Re: Apple and the risks of trading 29,000 times per second

#35
post #11

Earlier quoted context omitted.

Even though it will be hard to determine the optimal amount of trading per second, you have to agree that the situation now is far from normal. One of the most important economic benefit, and function of the stock market, is to allow companies to raise capital. High frequency trading does nothing to promote this goal. In some sense the stock market today is more like a gambling hall.

Well said. As in some casinos, in the world's stock markets some big players (probably including certain HFTs and hedge funds) take much more of the winnings than small ones, due to information asymmetry or pure competitive advantage (e.g. due to extremely fast trading and advanced algorithms). The more money is sucked from the market by intelligent arbitrageurs/gamblers, the less there is for small(er) investors. Th…

I didn't downvote you, but you're wrong for a huge variety of reasons.

Firstly and most importantly, the stock market is not zero-sum.I don't know why you think it is.Equities in companies ideally (and historically) grow in real value.This is basic common sense.If your friend sells you a stake in his company, you have an ad-hoc stock market (a buyer and a seller for company equity). Is one of you destined to lose in this deal? Or can the company do well and you both succeed?

What's going on with HFT is not a novel way to exploit the system. Financial pros will always get the information sooner and be able to act on it more quickly/efficiently than retail investors. People who suggest otherwise are deluding people for political purposes. Before computers existed, people on Wall Street still got the information first and acted on it first.

What computers have done is made the whole thing quicker and more convenient. If you want to fill an order you are much more likely to be able to. Those advanced algorithms help make sure things are correctly priced which is good for buyers and sellers. The companies looking for investment benefit from this. The smaller investors aren't hurt by this at all from this, assuming they are trying to invest in value and not take advantage of arbitrage opportunity.

Contributing liquidity and pricing information to the market is valuable. Some people do it faster and better than others and so they profit from it. It's unclear to me why they need to do a worse job of it so that other people can share in this value. Should Google be limited to only providing so many search results a day so that other small(er) search engines can get some of the wealth too? What exactly is the problem, besides the general popularity of banking fear-mongering recently?

Re: Apple and the risks of trading 29,000 times per second

#36

Earlier quoted context omitted.

If the claim is that a sell at 582 executed and a buy at 583 did not execute, I want to see evidence. I see variations on this claim with a frequency approaching high, always by a random internet commenter "betting" on some hypothetical. the price has moved too quickly for the exchange to keep up. What does that even mean?

Edit: added link to show that orders don't necessarily get filled according to time priority ("an order clearly arrived later than ours with the same limit price, yet it was filled and we were not.") It's only hypothetical until it happens to you. Refer to the fleitz's comment about short squeeze. That's an example of orders that don't get filled. In theory the broker is supposed to borrow shares to allow the trader…

Thank you for the TWX pdf, but is now a good time to point out that the entire paper was dedicated to proving that HFT is a good thing? Their solution to the order priority is also removing artificial regulations, not adding more. I feel like I should have been the one to post that link.

Re: Apple and the risks of trading 29,000 times per second

#37

Earlier quoted context omitted.

Edit: added link to show that orders don't necessarily get filled according to time priority ("an order clearly arrived later than ours with the same limit price, yet it was filled and we were not.") It's only hypothetical until it happens to you. Refer to the fleitz's comment about short squeeze. That's an example of orders that don't get filled. In theory the broker is supposed to borrow shares to allow the trader…

Thank you for the TWX pdf, but is now a good time to point out that the entire paper was dedicated to proving that HFT is a good thing? Their solution to the order priority is also removing artificial regulations, not adding more. I feel like I should have been the one to post that link.

The paper presents the case that HFT as it is practiced right now is bad due to regulations.

But we do not know if tweaking the regulations is the "right" move. Could be a case of "out of the frying pan and into the fire".

Re: Apple and the risks of trading 29,000 times per second

#38

Earlier quoted context omitted.

You'll just make the spread larger by the amount of the tax. Why is this a good thing?

While it would make the spread larger, I disagree with your use of the word "just". It would have many other effects as well - for one thing, it'd make trades on small shifts in value (ie less than twice the sales tax) unprofitable. That would make HFT much less attractive at the ridiculous frequencies it happens currently, as you'd need to hold on to stock for longer for it to shift enough for the gross gain to exce…

That would make HFT much less attractive at the ridiculous frequencies it happens currently, as you'd need to hold on to stock for longer for it to shift enough for the gross gain to exceed the sales tax.

This is true if for some reason the HFT wants to take liquidity on both sides of the trade. In reality, the HFT will probably add liquidity on both sides of the trade, making a profit equal to the true spread plus any change in price. Moves of one tenth of a cent will continue to be massively profitable for the HFT, but the HFT's counterparty will have to pay a much larger spread.

One group of people who commonly take liquidity on both sides of the transaction are retail investors, so they would end up taking a great deal of the losses created by this tax.

Re: Apple and the risks of trading 29,000 times per second

#39
post #32
post #6

Earlier quoted context omitted.

Retail 'investors' shouldn't have any issue with BATS if anything BATS provides liquidity, however retail 'traders' stand no chance because the computer is far better at technical analysis and pattern matching than the average trader. Retail traders never really stood a chance against institutions because retail trades the market rather than creating it like institutions do. eg. A retailer can't execute a short squee…

No one needs 29,000 trades a second liquidity. HFT serves no market making function. It is a drag on market operations and confidence.

No trader is doing 29,000 trades a second.

BATS is an exchange like NASDAQ. They're facilitating and executing trades for their clients. NASDAQ handled 70k per second in 2008, and could handle almost 4 times that load(http://www.forbes.com/forbes/2009/0112/056.html).

HFT has nothing to do with this.

Re: Apple and the risks of trading 29,000 times per second

#40

Earlier quoted context omitted.

Well said. As in some casinos, in the world's stock markets some big players (probably including certain HFTs and hedge funds) take much more of the winnings than small ones, due to information asymmetry or pure competitive advantage (e.g. due to extremely fast trading and advanced algorithms). The more money is sucked from the market by intelligent arbitrageurs/gamblers, the less there is for small(er) investors. Th…

I didn't downvote you, but you're wrong for a huge variety of reasons. Firstly and most importantly, the stock market is not zero-sum.I don't know why you think it is.Equities in companies ideally (and historically) grow in real value.This is basic common sense.If your friend sells you a stake in his company, you have an ad-hoc stock market (a buyer and a seller for company equity). Is one of you destined to lose in…

"Firstly and most importantly, the stock market is not zero-sum."

It is, unless you have another definition of zero-sum. The talk about companies "growing in value" ignores the fact that the "value" is purely what the market will pay for those companies. If the market is a closed system, i.e. companies are not being listed or delisted, then the net profit made by buyers & sellers if all transactions were to be closed out is zero, by simple summation. (Actually, it's negative, because of significant transaction fees.)

"If your friend sells you a stake in his company, you have an ad-hoc stock market (a buyer and a seller for company equity). Is one of you destined to lose in this deal? Or can the company do well and you both succeed?"

If the company does well and you sell the stake to a third person (C), then you've profited and C is left holding the bag. Every single trade that is closed out results in either a profit or loss to its participant, and it's only the fact that the more money is put into the stock market over time that obscures the fact that, if all extant trades were to be closed out at one point in time (i.e. everyone cashed out), the net profit of everyone involved would be zero.

The market keeps growing because new money and participants are flowing in, but if this stops (say, due to foreign investors wanting to put their money elsewhere, or a shrinking investor population, or a recession), then all you have is a moribund market into which existing investors dare not put more money. The average profit for trades goes to zero because the average stock price is not moving up or down.

This is practically illustrated whenever a bubble bursts and money leaves the market: many participants start taking the losses that had been hidden by the previously rallying prices. The winners are the ones who got out first and took profits from those inflated prices.

I argued this point with two friends of mine, one who was an investment advisor, and another who was an oil trader. The advisor said that it wasn't zero sum and the market was always expanding, but after a bit of discussion and graph-sketching, he came to see that it was zero-sum after all. The oil trader (a pretty savvy chap) said, "Yeah, that's obvious. That's the game I play every day."

(I think this can be extended further to encompass the various financial markets as alternative sectors of a giant investment market offering various classes of product. In the end, each market is zero-sum, and so the overall investment market is zero-sum, which is obscured by the increase in production as technology advances. But this part is more speculative so I won't push it.)

I'm a bit occupied atm so I'll reply to the rest of your message if there's still interest later.

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