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A High Frequency Trader's Apology, Pt 2

chrisstucchio.com

21–30 of 242 posts

Re: A High Frequency Trader's Apology, Pt 2

#21

What's the social and economical value of precisely discovering the price of casino tokens? Stock market is economically important only when company issues new stock. Apart from that it's just a huge casino where people like to play with their or other peoples money.

The secondary market provides liquidity to investors who participated in the initial company stock issuance. Without a robust means for selling their shares at some point in the future, investors would be loathe to provide capital in the first place.

Re: A High Frequency Trader's Apology, Pt 2

#22

One point that is bothering me is this: how much of the existence of HFTs is an artifact of the rules of the exchange? In particular, the rule that the first bid gets priority in executing the trade. It strikes me that the entire existence of HFTs seems to be taking advantage of this failure of mechanism design.

Not all exchanges do time-based priority. For example, the Philadelphia Stock Exchange (PSX) operated by NASDAQ uses a pro-rata allocation based on order size at a given price level. See rule 3307, "Book Processing", at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLXTools/Pl....

Re: A High Frequency Trader's Apology, Pt 2

#23

Loving this series of articles! Does any of this low-latency work make it back upstream into Linux or other parts of the software stack? As a latency-obsessed person I would love to know that the fruits of all this labor were available to me for my own low-latency systems. To me, that alone would be enough to feel that the latency-race is providing value to the world. Also, one thing that was not clear to me is how e…

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Re: A High Frequency Trader's Apology, Pt 2

#24

What's the social and economical value of precisely discovering the price of casino tokens? Stock market is economically important only when company issues new stock. Apart from that it's just a huge casino where people like to play with their or other peoples money.

to use your analogy. in the real world most managers of publically traded companies try to increase the price these are traded at.

meanwhile, people buy based on their expectation of future price.

So, this is a casino where the dealers are trying to make the chips worth more. It doesn't matter why, this is just reality (generally). But the dealers don't just deal chips all day - they spend real money in the real world, and loads of it. On sales, manufacturing, advertising, research and development, infrastructure, you name it. All to (again, generalizing) increase the price their chips are being traded at. (For various reasons they have incentive to do this, or if not incentive then at least philosophy/approach.)

Say you meet the dealer named (CEO of x). Now if you can convince him that doing y action in the real world will increase the price of his tokens, he might just do it.

Even if it means spending millions or billions of his company's money.

This is the status quo.

Now, what are the results of this status quo? Does it mean that companies will do whatever will increase their share price? No. Does it mean companies will do whatever they expect will increase their share price? No. Does it mean share price realistically reflects a company's investment in doing something to become financially or objectively or in some way convincingly "better"? No.

Nothing follows from this, but there are some things that almost follow.

One of them is that in the real world real money is being spent trying to get real customers, to get real innovations, and so on.

In a way, the precisely discovered price of a casino token is like a carrot on a stick. It points somewhere, (to stretch the analogy it points up or down), and does so as a result of the rider moving it.

In this case the 'rider' is investor opinion. (Alternatively, though false, you can assume that all information in the world is factored into the price, that the price is somehow 'efficient' with respect to all the information in the world about that company that's public. While ridiculous and false, this is/was a dominant or important academic model for a long time.)

What I'm getting at is that it's a lot simpler than just being tokens. There is a complex system here that you can draw some generalizations from. I mean, to take nothing else, just remember that when a company's "token" price gets too low, its investors will vote for an acquisition in cash by a bigger company in the same industry at a premium over its "token price". That would have a very real effect in the real world. It's just so much more complicated than you give it credit for. Is it good? Should we have it?

Well, all the recent private equity activity says, you know, not always. But there are some interesting things that happen when you put your company into the 'token world.' It's most certainly not just tokens.

Re: A High Frequency Trader's Apology, Pt 2

#25
post #9

Why apologize? Noone's robbing anyone here. If it's legal, it's legal.

The first sentence in the article: "About the title Many people were misled by it, and this wasn’t my intention. I was merely alluding to the book by Hardy, A Mathematician’s Apology, which spent time explaining and justifying his life as a mathematician. (Hardy, in turn, was alluding to the Apology of Socrates. It’s an apology in the classical sense (an intellectual justification), not an expression of remorse. My m…

Between Socrates and Hardy lies is a long tradition of "Apologetics", the intellectual defense of beliefs or actions (especially religious ones).

http://en.wikipedia.org/wiki/Apologetics

Re: A High Frequency Trader's Apology, Pt 2

#26
post #12

Earlier quoted context omitted.

How else would you do it? At random? Why would that be better?

Possibly. It would stop the arms race that adds little value to the economy. The same arms race happened in the pits, except it was height, not latency. It seems a bit ridiculous that a taller trader would make more money that a smarter one, and that a faster algorithm makes more money than a smarter one.

Intelligence is also a function of speed. All else being equal, a faster solver will win over the slow one. A faster learner will accumulate much more knowledge in less time.

In warfare, it pays to react faster than your opponents. You don't have time to think slowly about how you're going to shoot. You'll just have to shoot accurately and utilize tactics that you already know.

Re: A High Frequency Trader's Apology, Pt 2

#27

What's the social and economical value of precisely discovering the price of casino tokens? Stock market is economically important only when company issues new stock. Apart from that it's just a huge casino where people like to play with their or other peoples money.

The secondary market provides liquidity to investors who participated in the initial company stock issuance. Without a robust means for selling their shares at some point in the future, investors would be loathe to provide capital in the first place.

Most markets have far more liquidity than is really needed.

Re: A High Frequency Trader's Apology, Pt 2

#28
post #12

Earlier quoted context omitted.

How else would you do it? At random? Why would that be better?

Possibly. It would stop the arms race that adds little value to the economy. The same arms race happened in the pits, except it was height, not latency. It seems a bit ridiculous that a taller trader would make more money that a smarter one, and that a faster algorithm makes more money than a smarter one.

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Re: A High Frequency Trader's Apology, Pt 2

#30
One market structure alternative that is gaining some traction in US equities is PDQ: http://www.pdqenterprises.com/faq.html

Basically, liquidity providers upload their market making algo to the matching engine. Every time an order comes in, there is a 20ms 'mini auction' in which market making algos compete on intelligence and not on speed.

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