Study: High Speed Trading Hurts Long-Term Investors
online.wsj.com
Study: High Speed Trading Hurts Long-Term Investors
1–10 of 38 posts
Re: Study: High Speed Trading Hurts Long-Term Investors
#2Gah what a stupid article. Consider its foundational point:
"Pragma measured the effect by comparing the volume in certain stocks with the time it takes to execute an order. Longer execution times typically result in poorer results, since a stock's price can swerve away from where it was when the order entered the market. Such an effect is known in the industry as a "shortfall.""
If you are a "long term" investor you don't sell stocks to capture a few pennies here and there. You buy at price $X and hold it for a while, maybe you put in a stop order [1] so that if the shares start heading for the floor you will automatically exit. You set a value you want to see for your 'gain' and you set a limit order [2] when the stock starts getting close. The limit fires and you exit the stock. Even if it keeps rising and rising.
The basis for the claim in the article is that some HFT house might buy your stock when it hits the limit order price, because it is predicting it will go higher and then instantly resells it for a bit more than your price. You've cashed out already (closed your position) and they skimmed a bit of cream off the top. You didn't 'lose' any money at all.
For those not familiar with stock trading:
[1] A 'stop' order tells the firm holding your stock that if the stock drops below a certain price (the stop price) to automatically sell the security. So if you buy a stock at $10/share and you don't want lose more than 20% on it you might set a stop order for $8/share.
[2] A limit order goes the other way, you tell the broker that if the stock ever gets to a certain price to sell your shares. So if you are looking for a 10% return on your $10/share stock you might put a limit order in for $11/share. (or $11.25 if you want the 'net proceeds' to be $11/share).
Re: Study: High Speed Trading Hurts Long-Term Investors
#3Gah what a stupid article. Consider its foundational point: "Pragma measured the effect by comparing the volume in certain stocks with the time it takes to execute an order. Longer execution times typically result in poorer results, since a stock's price can swerve away from where it was when the order entered the market. Such an effect is known in the industry as a "shortfall."" If you are a "long term" investor you…
> If you are a "long term" investor you don't sell stocks to capture a few pennies here and there.
Yes, but I'm still certain that high frequency traders are siphoning value off long term traders when the latter have to transact.
Re: Study: High Speed Trading Hurts Long-Term Investors
#4Gah what a stupid article. Consider its foundational point: "Pragma measured the effect by comparing the volume in certain stocks with the time it takes to execute an order. Longer execution times typically result in poorer results, since a stock's price can swerve away from where it was when the order entered the market. Such an effect is known in the industry as a "shortfall."" If you are a "long term" investor you…
> If you are a "long term" investor you don't sell stocks to capture a few pennies here and there. Yes, but I'm still certain that high frequency traders are siphoning value off long term traders when the latter have to transact.
I would be interested to hear the sequence that makes this true. Lets say I put a limit in on stock FOO at $32 and it fires and I get my $32 * n dollars. What did the HFT do to siphon value off my trade? Or off the stock for that matter?
Re: Study: High Speed Trading Hurts Long-Term Investors
#5Earlier quoted context omitted.
> If you are a "long term" investor you don't sell stocks to capture a few pennies here and there. Yes, but I'm still certain that high frequency traders are siphoning value off long term traders when the latter have to transact.
I would be interested to hear the sequence that makes this true. Lets say I put a limit in on stock FOO at $32 and it fires and I get my $32 * n dollars. What did the HFT do to siphon value off my trade? Or off the stock for that matter?
The aggregate effect of HFT might change the amount people decide to put on orders, resulting in their buying higher and selling lower.
So, in the interest of disclosure, do you do HFT? You seem to have an interest in defending the notion that high frequency traders have no overall effect.
Re: Study: High Speed Trading Hurts Long-Term Investors
#6This comment from the article pretty much sums it up:
"This study treats correlation as though it were cause and effect. The fact that HFTs choose to trade stocks with bid-ask spreads of two cents (instead of one cent) does not mean that the HFTs have made that spread larger. The high liquidity provided by HFT has to let anyone with a market order receive a more favorable price than they would in the less-liquid market without HFT. HFT is simply improvement of the labor of market-making through the use of machines. For the past three hundred years, virtually every mechanization which improved the productivity of labor was fought by the establishment. This is no different."
Re: Study: High Speed Trading Hurts Long-Term Investors
#7Earlier quoted context omitted.
I would be interested to hear the sequence that makes this true. Lets say I put a limit in on stock FOO at $32 and it fires and I get my $32 * n dollars. What did the HFT do to siphon value off my trade? Or off the stock for that matter?
The aggregate effect of HFT might change the amount people decide to put on orders, resulting in their buying higher and selling lower. So, in the interest of disclosure, do you do HFT? You seem to have an interest in defending the notion that high frequency traders have no overall effect.
Per the disclosure request : I am not an HFT trader, nor are any funds I invest in managed by HFT traders. Perhaps this makes me clueless :-)
To respond to your comment though,
"The aggregate effect of HFT might change the amount people decide to put on orders, resulting in their buying higher and selling lower."
I'm trying to figure out the linkage. What mechanism would connect the order pricing from a long term investor with the activities of an HFT trader? HFT works in the first and second derivative space of values and long term traders seem solidly in the linear space. Can you construct and example where the activities of an HFT trader are both visible too, and influential on, the pricing targets of a long term investor?
Oh I do have some Bank of America stock (one of the stocks called out in the article) which I bought in 2009 when they were pummeled by the Countrywide fiasco and their inability to get another CEO, sold half of it for a 100% gain, (net 50% gain on the total investment) and have watched the remainder go up and down. I got my 50% return (and that cash is working elsewhere) and I've got some extra shares that I could sell for anything over $0 to add to that gain (although if you want to do the annualized computation it gets lower if I holder it longer etc etc) but holding that since 2009 pretty much defines a 'long' holding.
Re: Study: High Speed Trading Hurts Long-Term Investors
#8The Pragma report [1] that the WSJ refers to investigated when a TWAP algo would need to "cross the spread". Ie, when the order book is really deep, then it takes so long for a passive order to execute that crossing the spread becomes necessary.
This effect has nothing to do with HFT firms. In fact, the referenced white paper doesn't even mention HFT at all! So it's odd that Pragma's CEO would make such a remark to the WSJ.
It's even odder that the Pragma paper doesn't mention the numerous other ways of executing a passive order, such as pegged orders, pro-rata venues, low-rebate exchanges, or even crossing networks. The authors describe a totally out-dated view of how liquidity is accessed for a stock like BAC.
Re: Study: High Speed Trading Hurts Long-Term Investors
#9Gah what a stupid article. Consider its foundational point: "Pragma measured the effect by comparing the volume in certain stocks with the time it takes to execute an order. Longer execution times typically result in poorer results, since a stock's price can swerve away from where it was when the order entered the market. Such an effect is known in the industry as a "shortfall."" If you are a "long term" investor you…
> If you are a "long term" investor you don't sell stocks to capture a few pennies here and there. Yes, but I'm still certain that high frequency traders are siphoning value off long term traders when the latter have to transact.
I disagree. Most HFT is market making (passive trading with limit orders only), and they make most of their money from short-term and impatient traders, who account for most of the volume and repeatedly pay the spread. Long-term traders, by definition, don't trade very often so they're a small fraction of the total volume.
And its the market makers who provide the liquidity (with limit orders) for the long-term traders when they do decide to trade, not the short-term traders (who take liquidity with market orders).
Re: Study: High Speed Trading Hurts Long-Term Investors
#10Gah what a stupid article. Consider its foundational point: "Pragma measured the effect by comparing the volume in certain stocks with the time it takes to execute an order. Longer execution times typically result in poorer results, since a stock's price can swerve away from where it was when the order entered the market. Such an effect is known in the industry as a "shortfall."" If you are a "long term" investor you…
> If you are a "long term" investor you don't sell stocks to capture a few pennies here and there. Yes, but I'm still certain that high frequency traders are siphoning value off long term traders when the latter have to transact.
I would expect long-term investors to be least affected by HFT. Can you provide a concrete example of how HFT would hurt a long-term investor?