Great article explaining high frequency trading:
What Business is Wall Street In?
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Re: What Business is Wall Street In?
#72It is getting increasingly difficult to just invest in companies you believe in. Like how twenty years ago you could buy a stock you believed in for like $4 by using a computer system, paying a fraction-of-a-penny spread on average, to have a trade executed in milliseconds to seconds, but now you have to talk to a human on the phone and pay a $400 commission to pay a fraction-of-an-eighth spread and have the trade ex…
"It is getting increasingly difficult to just invest in companies you believe in." You're interpreting that sentence literally. His point is that investing in a company used to largely be based on how successful you though that company would be. The market has changed in a way that an overwhelming number of external factors can have a negative (or positive) impact on that company's share price, making the evaluation…
This is only true if you're "investing" on unreasonably short time horizons. And this has always been the case:
"In the short run the market is a voting machine. In the long run it's a weighing machine." - Warren Buffet, quoting Benjamin Graham
Re: What Business is Wall Street In?
#73Earlier quoted context omitted.
I think it's a miracle that you can ask for $500 dollars of a thinly traded stock and quite quickly get an offer to get it at $515. That's how market makers make money. They match up investors who want to buy and sell the amount they want to sell at the time they want to sell it. Contrast to the private corporation that I own shares in, where it's taken me weeks to broker a deal to buy some more shares from another s…
This really has nothing to do with retail investors. Retail is completely insignificant. Its about what the bulk of the trading is: robots trading with robots without any regard to the stocks they are trading. The big whales are the mutual funds and they have to execute their buy/sells using special techniques of spacing trades out to try to not show what they are up to. Otherwise the HFT spots it (and they usually d…
>Its about what the bulk of the trading is: robots trading with robots without any regard to the stocks they are trading. The big whales are the mutual funds and they have to execute their buy/sells using special techniques of spacing trades out to try to not show what they are up to. Otherwise the HFT spots it (and they usually do) and then front runs all of the trades, just skimming pennies off. What use are they ?
They can do the trade slightly faster, and according to the rules of the market, if you place an order to sell with a limit of $50 then someone willing to buy now for $50 beats someone willing to buy a second later for $51. If that's not what you wanted, you should have made the limit $51.
Maybe we need new order types, but that would set off a slew of complaints about additional complexity. And note that eliminating the sub-penny rule would put a lot of the front-runners out of business, since they'd only be making $.001 per share rather than $.01.
Re: What Business is Wall Street In?
#74Earlier quoted context omitted.
His main poing is wrong. High Frequency Trading makes trading stocks cheaper. There have always been market makers. They used to be expensive humans. Now they are cheap computers. This means that it now costs less for you to trade a stock.
By demanding automation, HFT drives down the operational cost of a particular transaction. However, for trades themselves, it's arguable that it drives up the cost of the overall transaction for long-term traders - especially those who end up needing to break up a larger overall stock transactions into smaller batches.
I find it hard to believe the overhead of doing that comes to more than $.24/share.
It does mean the market demands more knowledge; it's more sensitive now, so you can no longer do a buy or sell "at market" and expect a good price. But even if you don't know how to play the market you can go through a broker and still pay far less than you would've in the "good old days".
Re: What Business is Wall Street In?
#75It is not a zero sum game between you and HFT. It IS a zero sum game between an HFT firm and another HFT firm, or an HFT firm versus people specialist traders. You think that burly guy from queens who used to be a janitor and now works on the floor of the NYSE will give you a good price? HFT cuts the line in the sense that it competes with him to give you a better price. HFT firms are fast to compete for your business vs other HFT firms. HFT and the average retail investor is not a zero sum game. It is mostly zero sum between HFT and the old system of specialist traders. It turns out the biggest critics of HFT are the old specialists who have lost their jobs and people who do not know what they are talking about.
So say you trade against an HFT algorithm. If you are talking about the narrow context of the trade, it is zero sum. But that is not how the world works. Bill Gates can sell a share of Microsoft to a market maker trader/HFT. Say he does this for $26.00. Tomorrow, it goes to $30.00. In the context of the trade, Bill Gates "loses" $4 to the HFT algorithm. But that is not the whole story. He took that $26 and did something with it. Maybe he helped fund a startup which has created value and doubled his money. So now the HFT trader is up $4, and Bill Gates is up $26. Zero sum, huh? Or maybe he invested it in a Malaria vaccination program that has no easy dollar valuation but is clearly positive to the world. This is why in the context of the system, everyone can win, and it can be a positive sum game.
If you invested your savings 18 years ago for your kid to go to college, at some point you will sell that stock to raise cash and pay for college. You are investing in your child's education, so that he can have a good life, invent things, cure cancer, solve P vs NP, improve Shor's algorithm, and more. That seems like a good return, even if 4 years later the HFT algorithm you sold your stock to made money because the stock went up.
When the world changes, prices change as well. As an HFT firm, you are always sending prices that are competitive for customers. HFT being fast is the effort to improve prices as quickly as possible, or admittedly, pull prices if they are no longer fair. Often, this is a typical scenario for an HFT firm…news comes out on a stock that is positive. The old bid for the stock was 20.00. That means if you are sending an order to sell your shares in the stock, to say, raise money to send your kids to a good college, you will hit the bid at 20.00. If HFT is not fast, you will get $20 for your share, even though the news hit 2 seconds ago. HFT algorithms compete for your business in the sense that they try to be fastest to improve that bid price to 20.05. If they are not fast, you get $20. If they are fast, then you get $20.05. What is the problem here?
The bottom line of all this misunderstanding is, I believe, a distrust of where all this money is coming from that they make. It's simple--it's from them cannibalizing the old human, specialist trader business (do you know how many billions they made from retail before HFT?). It's no different from a startup upending an old industry veteran by undercutting their prices by 90% and taking away all their business.
Re: What Business is Wall Street In?
#76There is little productivity created in the wall st business. As the author states little of what Wall St does is raise capital for companies. Mostly it facilitates trading stock which is basically people trying to make money off of other people who have enough money to buy stocks. You buy your 'chips' and trade them and hope to make a profit. As far as the rest of the economy is concerned, little productivity is created from this action. It's as productive as gambling is, which would be analogous to Wall St's true business.
Re: What Business is Wall Street In?
#77Earlier quoted context omitted.
HFT works to quickly create momentum in pricing (Note: there are alternative theories that this is not the case to be sure) which changes a large quantity of stock prices for the day. And when the market is having a down day other stocks that have nothing to do with the stocks being traded are changed as well. So if the market is down someone's investment in Patrick's BCC will have a large chance of dropping as well.…
Please explain what you mean by "HFT works to quickly create momentum in pricing." What is bad/wrong/unlawful/unethical about: >"And when the market is having a down day other stocks that have nothing to do with the stocks being traded are changed as well. So if the market is down someone's investment in Patrick's BCC will have a large chance of dropping as well." And just to check: do you think it would NOT be bad/w…
>It seems like you take issue with that fact that stock price changes have become more correlated. Is it bad/wrong/unlawful/unethical that traders may want to sell(buy) stock A when the price of stock B decreases(increases)?
It suggests the market is no longer performing its intended function of allocating capital to those companies that will use it most efficiently.
Re: What Business is Wall Street In?
#78Love Cuban, but his target is program trading, not Wall Street. And trading serves its purpose as it makes the market more efficient. Arbitrage opportunities will always narrow or close over time. His argument is like saying that someone that buys and sells used cars has a big advantage over me the consumer, therefore buying a car is rigged. I know that implicitly, it's the friction of low transacting.
Love Cuban, but his target is program trading, not Wall Street. It is my understanding that program trading and HFT account for 99+ percent of the trade volume at this point; how shall we even distinguish Wall Street from automated trading then?
Trading is different from the initiation of capital investments through different vehicles like stock and bond issuance and the creation of value through M&A. Again, if the argument is trading specific versus wall street abstract, there is a point to be made.
Think how much bacteria is in our body, take it all out and we don't run as efficiently. program trading is the same.
Re: What Business is Wall Street In?
#79It is getting increasingly difficult to just invest in companies you believe in. Like how twenty years ago you could buy a stock you believed in for like $4 by using a computer system, paying a fraction-of-a-penny spread on average, to have a trade executed in milliseconds to seconds, but now you have to talk to a human on the phone and pay a $400 commission to pay a fraction-of-an-eighth spread and have the trade ex…
First let me say that I agree with most of Cuban's thoughts in general. But by "invest" he is not talking about the friction out there (paraphrase as "having to spend $400 and talk to a human") to purchase a stock but rather the price of the stock in relation to the value being manipulated by, as one example, high frequency trading and macro economic conditions. Let's say someone decides to invest in Bingo Card Creat…
>Of course in the past I do believe people did make more long term investments. There were places to put "widow and orphans" money. Not sure that is the case today anymore (is it?)
I think you can find them if you look for them. Though generally I'd say stick your money in a low-fee S&P 500 tracker; if that's too volatile for you, you probably should be keeping it in cash rather than investing.
Re: What Business is Wall Street In?
#80Earlier quoted context omitted.
And how do those changes (especially #2) "have a negative (or positive) impact on that company's share price" ?
In the extreme, repeal of Glass-Steagall and resulting shenanigans put the entire market at risk, which in turn put the macro economy at risk, which in turn changed the long term outlook of stocks. That said, I do question the overall premise that HFT affects stock values over the long term.
That's fair. But I think that's getting pretty far from what Cuban was complaining about.
I also don't think that "government decisions can have a big impact on the economy" is a new phenomenon.