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What Business is Wall Street In?

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Re: What Business is Wall Street In?

#91

Post by maxerickson »

plc wrote: post #64
crucialfelix wrote: post #38

Earlier quoted context omitted.

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…

All right, enough. The amount of ignorance out there about HFT is huge. I developed HFT algorithms in a previous life at a very large, well known bank. The majority of trades out there are in fact market making related. The ones that are market taking are usually at the expense of OTHER HFT algorithms, the ones that are slow and showing out dated prices. And yes, HFT algorithms most DEFINITELY hold inventory. Some do…

If the HFT was hugely beating the buy mechanisms that mutual funds were using, I would expect the mutual funds to start looking to buy HFT services.

I wonder how much of the dislike for HFT comes from applying intuition about 2 party trades to a many party market. Mostly, I think people ignore that the HFT systems are competing with each other, not just arbitrarily stepping into the middle of transactions. The latter really violates intuition about fairness.

Re: What Business is Wall Street In?

#92

Post by uptown »

harryh wrote: post #89
uptown wrote: post #83

Earlier quoted context omitted.

In order to make money on a trade, the share price needs to move. So you've got algorithms whose attributes manage things like how much of an actual order is exposed to the market at one time, or how much they adjust your bid or ask as the order progresses. I've got some algo documentation whose algo "Watch Out For" notes warn "may be too aggressive and cause impact" and "must watch out for order size that adversely…

> it's got the potential to destabilize the entire market. No, it really doesn't. There's not a boogey man hiding under your bed just waiting to get you. You know what would happen if a bunch of computer algorithms went crazy and mispriced a bunch of stocks? The guys running that code would get taken for a bath(1). If a bunch of computers went crazy today and started selling shares of GOOG for $20 then the humans wou…

"On the same day the company's stock plunged 33 percent, to $3.39; by the next day 75 percent of Knight's equity value had been erased."

So in the example you linked, a computer algorithms went crazy, and anybody invested in Knight Capital got hosed ... as did anybody elsewhere in the market that reacted to that instability. Not exactly a convincing argument that it can't or won't happen again potentially on a much larger scale. You basically confirmed my point.

Re: What Business is Wall Street In?

#93

Post by harryh »

uptown wrote: post #92
harryh wrote: post #89

Earlier quoted context omitted.

> it's got the potential to destabilize the entire market. No, it really doesn't. There's not a boogey man hiding under your bed just waiting to get you. You know what would happen if a bunch of computer algorithms went crazy and mispriced a bunch of stocks? The guys running that code would get taken for a bath(1). If a bunch of computers went crazy today and started selling shares of GOOG for $20 then the humans wou…

"On the same day the company's stock plunged 33 percent, to $3.39; by the next day 75 percent of Knight's equity value had been erased." So in the example you linked, a computer algorithms went crazy, and anybody invested in Knight Capital got hosed ... as did anybody elsewhere in the market that reacted to that instability. Not exactly a convincing argument that it can't or won't happen again potentially on a much l…

Your original point was:

"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"

Knight Capital loosing a ton of money was not due to an external factor. It was due to an internal factor. The fact that they (apparently?) accidentally deployed a bunch of test code to production. Oops!

Re: What Business is Wall Street In?

#94

Post by josephlord »

its_so_on wrote: post #81

i'm about to make a nuanced, technical argument, and i don't know if it's correct. if you understand it, your feedback is appreciated. so, i believe information asymmetry is possible. i believe that many good ideas are in such a relationship with the world that the people who have them have an asymmetric advantage over those who don't: that possession of the idea equals wealth, as long as you are attempting to execut…

I think I understand and don't think that you are necessarily wrong but I'm not sure it is a particularly useful way to look at the world.

Enron was famous for booking predicted lifetime profits based on the ideas that they had and look how that turned out. It isn't logically wrong but it probably is too hard to do realistically, not just predicting the profits in the first place but updating them with circumstances.

If your person had his bolt in the blue and became richer the moment he/she heard about a competitor launching before them with a similar idea would instantly become poorer (as they wouldn't have the market to themselves) and they should remark their book value.

BTW without capitalised sentences and in stream of thought style I found this really hare to read. I suggest you work on the presentation before explaining it to anyone else.

Re: What Business is Wall Street In?

#95

Post by uptown »

harryh wrote: post #93
uptown wrote: post #92

Earlier quoted context omitted.

"On the same day the company's stock plunged 33 percent, to $3.39; by the next day 75 percent of Knight's equity value had been erased." So in the example you linked, a computer algorithms went crazy, and anybody invested in Knight Capital got hosed ... as did anybody elsewhere in the market that reacted to that instability. Not exactly a convincing argument that it can't or won't happen again potentially on a much l…

Your original point was: "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" Knight Capital loosing a ton of money was not due to an external factor. It was due to an internal factor. The fact that they (apparently?) accidentally deployed a bunch of test code to production. Oops!

My point was that external factors can have an impact on the stock price of an company in ways that previously hadn't been possible, and I cited HFT as one of those factors. You cited Knight Capital whose "internal factor [...] (apparently?) accidentally deployed a bunch of test code to production" resulted in "trading activities [that] caused a major disruption in the prices of 148 companies listed".

So yes - in this case, the internal factor of Knight running a flawed algorithm turned into a very real external factor for those 148 companies, as well as anybody else whose trading was impacted along the way.

Re: What Business is Wall Street In?

#96

Post by harryh »

uptown wrote: post #95
harryh wrote: post #93

Earlier quoted context omitted.

Your original point was: "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" Knight Capital loosing a ton of money was not due to an external factor. It was due to an internal factor. The fact that they (apparently?) accidentally deployed a bunch of test code to production. Oops!

My point was that external factors can have an impact on the stock price of an company in ways that previously hadn't been possible, and I cited HFT as one of those factors. You cited Knight Capital whose "internal factor [...] (apparently?) accidentally deployed a bunch of test code to production" resulted in "trading activities [that] caused a major disruption in the prices of 148 companies listed". So yes - in thi…

The share price for those 148 companies barely moved.

Re: What Business is Wall Street In?

#97

Post by Retric »

Ntrails wrote: post #62
BenoitEssiambre wrote: post #55

In the past few years, I've been a fervently anti-bank corruption, often aligning myself with the occupy wall street crowd. However, unlike most people with my views, I see algorithmic trading as not a symptom of, but one of the solutions to the problems in investment banking. Maybe it's because of my background in machine learning, but I view computers as a way to reduce the amounts of arbitrage opportunities and in…

I find this idea that all the investment managers in the world exist simply by skimming off peoples retirement savings mind boggling. There are two main kinds of retirement savings, those where the retiree is in control of where their money goes - in which case they can choose to invest it as they wish. In an index, a company or anything else, and those where a company is investing on their behalf but with a legal ob…

What a lot of people are missing is "the market" can't grow faster than "the economy" over the long term. There has been a huge influx of money into the stock market as an increasing percentage of people hoping for historical returns. Causing people to chase after ever lower returns. It's gotten so distorted that the 'smart money' practically ignores growth in favor of other games.

HFT is the perfect example of this as they don't chase growth. There goal is to tax cash flows and market inefficiency. So, they leave low churn stocks like Berkshire Hathaway alone in favor of cheap stocks with a lot of turnover. If you keep your stock for an average of 10 years then HFT is meaningless to you. But, with hedge-funds often doing quite a bit of trading they can extract money without you realizing your trading.

In the end it's yet another reason 401k's are growing a lot slower than many people predict. Sort of like how people expect the economy to 'recover' when it was what there remembering is an unsustainable bubble.

PS: And of course Dividends are something of a special case in the above analysis.

Re: What Business is Wall Street In?

#98

Post by its_so_on »

josephlord wrote: post #94
its_so_on wrote: post #81

i'm about to make a nuanced, technical argument, and i don't know if it's correct. if you understand it, your feedback is appreciated. so, i believe information asymmetry is possible. i believe that many good ideas are in such a relationship with the world that the people who have them have an asymmetric advantage over those who don't: that possession of the idea equals wealth, as long as you are attempting to execut…

I think I understand and don't think that you are necessarily wrong but I'm not sure it is a particularly useful way to look at the world. Enron was famous for booking predicted lifetime profits based on the ideas that they had and look how that turned out. It isn't logically wrong but it probably is too hard to do realistically, not just predicting the profits in the first place but updating them with circumstances.…

sorry about the format, i'm intentionally trying to not so much to be accessible as to reach certain people who might already know. i'd like their feedback.

you are completely right that it's hard to peg the shift in present-wealth without a crystal ball, which nobody possesses - moreover, the future isn't even written.

so let's give you the crystal ball - it jumps wildly between valuation your net-present at a few million and hundreds of millions and sometimes billions and sometimes tens of billions and then millions again. it's useless.

but suppose that it is quite consistent that the idea is worth at least $20 million in net-present.

so, in this case - what is going on here when you, an only "competent" coder, are coding the idea yourself? Why would a millionaire code at a quality he could barely sell in the market (not being a coder), and which is just enough to show a prototype which gets funding, which gets the ball rolling, which... (all the things that lead to the net-present jumping between $20 million and billions, but never lower than the former).

So, what is going on here? Why is the person working at $0/hr producing work that's worth maybe $3-$4/hr? (buggy poor-quality spaghetti code php with no source control, for example.)

He is also directly losing a wage he could be earning elsewhere.

what is this behavior? What is going on here?

one answer could be, couldn't it, that he's producing low-quality, poor labor, because he has the chance to buy a chunk of a high-quality idea with it?

i mean, i personally know of a lot of stories of hundred-million dollar exits that started with an idea that the founder started following up on by-

- doing poor-quality accounting and business founding,

- poor quality legal research

- poor quality coding that had to be thrown away after his company was bigger

- poor quality biz dev that was mostly spinning company's wheels

a lot of other things of very low quality...

... but of quality just high enough that the idea pulls the company through, and his preconceptions can be changed by high-quality lawyers, his code is thrown away and rebuilt by real engineers, his b2b attempts are repeated by someone who can actually push deals through, his logo is replaced by a real logo that doesn't make you laugh, and so forht.

so, what just happened in this whole last example? what was the beahvior that led to it? (in abstract, theoretical, technical terms).

i want to know why he's buying his own low-price, low-quality labor, and why this works.

Re: What Business is Wall Street In?

#99

Post by rayiner »

twoodfin wrote: post #34
SeanLuke wrote: post #28

Earlier quoted context omitted.

You're saying that the stock market has no effects on society?

Everything has an effect on others. The question is whether those effects are the result of voluntary actions. As far as I can tell, nobody is being forced to invest on Wall Street. Everyone is free to keep their money in gold or under their mattress. Now, if everyone chose to do those things, that would have a huge negative effect on society, massively greater than anything Wall Street has ever inflicted. But that d…

"Forced" is something that has degrees. When we replaced private pensions with 401k's, and when we got rid of the firewall between commercial and investment banks, we made it very difficult for anyone to not invest in Wall Street.

Re: What Business is Wall Street In?

#100

Post by schneitj »

Ntrails wrote: post #62
BenoitEssiambre wrote: post #55

In the past few years, I've been a fervently anti-bank corruption, often aligning myself with the occupy wall street crowd. However, unlike most people with my views, I see algorithmic trading as not a symptom of, but one of the solutions to the problems in investment banking. Maybe it's because of my background in machine learning, but I view computers as a way to reduce the amounts of arbitrage opportunities and in…

I find this idea that all the investment managers in the world exist simply by skimming off peoples retirement savings mind boggling. There are two main kinds of retirement savings, those where the retiree is in control of where their money goes - in which case they can choose to invest it as they wish. In an index, a company or anything else, and those where a company is investing on their behalf but with a legal ob…

There are lots of ways to extract rent from the system.

I've read some stories where a pension / 401k plan was placing a large trade and HFT was able to detect it in progress and make money off the transaction. Look up front running, placing bids and withdrawing them, etc.

Even if you trust your investment manager, there are shenanigans going on in the system. The stock market isn't what it used to be.

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