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What Business is Wall Street In?

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Re: What Business is Wall Street In?

#111

Post by 001sky »

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 see algorithmic trading as not a symptom of, but one of the solutions to the problems in investment banking This is incredibly naive. Amazingly so.

"This can all be proven by something called the efficient market hypothesis" really? This is even worse.

Front running is a betrayal of the fundamental behavioural "assumptions" underpinning economic theory. By definition, without these assumptions, there is no EMH. So this whole thing falls apart.

That's why this is such a problem. If you really believe in markets, the first thing you do is make sure their underpinnings are not corrupted.

Its not clear that OWS believes in markets. The critique I'm outlining above is a seperate position alltogether.

Re: What Business is Wall Street In?

#112

Post by endtime »

nhaehnle wrote: post #110
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…

> This can all be proven by something called the efficient market hypothesis. Of course, the efficient market hypothesis is basically an unproven assumption. The general gist of it is obviously somewhat reasonable, but you have to be extremely careful what kind of statements you really believe. Just to make two obvious examples: the strongest form of EMH claims that asset prices reflect even hidden information. That…

> That cannot possibly be true either, because traders simply aren't that fast.

Forget traders...our universe has a speed limit.

Re: What Business is Wall Street In?

#113

Post by rhizome »

BenoitEssiambre wrote: post #85
mej10 wrote: post #70

Earlier quoted context omitted.

While ultimately I do agree with you, especially about humans trying to beat HFT in the short term, I don't think HFT and algorithmic trading are _currently_ the panacea you are making them out to be. http://en.wikipedia.org/wiki/2010_Flash_Crash

I agree that the system is not perfect because, lets face it, computers are not always that reliable. However, this is a problem that solves itself. If an algorithm goes haywire and drives the market down temporarily, that computer stands to lose a whole lot of money so there is tons on incentives to fix or retire that particular machine. Otherwise it would be easy to make a very profitable algorithm on the back of t…

Google the term "bear attack," you aren't accounting for the possibility that the algos can (try to) kill a company.

Re: What Business is Wall Street In?

#114

Post by aqme28 »

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'm just going to handle this one point: "Nowadays every time a human trader tries to beat the market by predicting short terms swings in prices, there is a computer on the other side of his internet connection that is relying on much more information and even models of the human's own personality and biases to trade against him. This means that unless the human has inside information that is not accessible to the computer, (and I'm sure those who operate these computers try to feed them or make them infer the greatest amount of direct or indirect insider knowledge as possible ) it will tend to be impossible to beat the market."

This isn't accurate. Computational trading uses models and algorithms. Even if the computer has all the information necessary, sometimes the models themselves have flaws. We're not at the point yet where the computers are making these perfect, predictive models. The humans who make them will make incorrect assumptions. We saw this issue big time in 2007, and we'll see it again.

Re: What Business is Wall Street In?

#115

Post by ypeterholmes »

Retric wrote: post #97
Ntrails wrote: post #62

Earlier quoted context omitted.

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…

I disagree that the market can't grow faster than the economy. Derivative markets for example.

Re: What Business is Wall Street In?

#116

Post by SilasX »

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…

Well, that or they would go crying to the exchange operators, and if they're influential enough, they'll get their sales of Google at $20/share reversed.

We would see a lot less of these disruptions if exchanges would make everyone live with the stupid exchanges their computers made.

Re: What Business is Wall Street In?

#117

Post by prodigal_erik »

maxerickson wrote: post #91
plc wrote: post #64

Earlier quoted context omitted.

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…

There are just two parties per share. The HFT bought each share from one seller and immediately sold it to one buyer; their optimal holding time is two round trips to the exchange. If the seller and buyer were both in market within a fraction of a second of each other and the trade would have gone through anyway, the HFT isn't adding any liquidity but parasitically attacking a flaw in the way the exchange matches and clears trades.

Re: What Business is Wall Street In?

#118

Post by Retric »

ypeterholmes wrote: post #115
Retric wrote: post #97

Earlier quoted context omitted.

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…

I disagree that the market can't grow faster than the economy. Derivative markets for example.

Note: over the long term

Compound interest is an exponential equation. Even 1% growth means doubling every 70 years and 1,000x growth every 700 years and 1 million x growth in 1400 years etc. Let's say US GDP is X$ and stocks are 'worth' a 100,000 X. At some point the market get's so far from the 'fundamentals' you get a crash, but it's more like a return to rational behavior.

PS: That's not to say tax breaks like 401k's cant shift things for decades. But, there is only so far you can inflate any bubble before it pops.

Re: What Business is Wall Street In?

#119

Post by tptacek »

It is really easy to convince nerds that Wall Street is fundamentally corrupt because of the exploitation of exotic sounding technology, like "high frequency trading".

The reality is that the vast majority of the damage Wall Street inflicted on the US economy had nothing to do with electronic trading. Until someone invents High Frequency Lawyering, the bulk of the work involved in trancheing collateralized debt instruments is going to be paperwork. Those instruments are traded OTC. While there are electronic markets for some of them, like swaps for blue chip companies, those markets have nothing resembling the volume of the NASDAQ. The '07-'08 crash was caused by evil phone calls more than evil computers.

The other thing you'd want to understand is that prior to electronic trading, Wall Street was crooked as a bucket of fish hooks. Before retail electronic trading, if you (you meaning anyone who didn't work for a trading firm) wanted to buy or sell a stock, you had to find an agent to execute the trade for you. As you can imagine, most people have call to engage an agent very few times a year, but agents work with each other all the time. You got worse prices because your orders would quietly be routed through the channels that secured the most grift for your broker.

There are bad things about HFT; for instance, they create an incentive to route very strong CS talent to Wall Street instead of Google. But before you decide that HFT must clearly be evil because it allows the Goldman Sachs of the world to get better deals than mom and pop stock traders (which, note to mom and pop: don't trade stocks), you should probably have a very good idea what a continuous double auction is, and what a market maker does, and have a good idea of who the "big fish" in HFT are actually preying on. It probably isn't your pension fund.

Re: What Business is Wall Street In?

#120

Post by maxerickson »

prodigal_erik wrote: post #117
maxerickson wrote: post #91

Earlier quoted context omitted.

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…

There are just two parties per share. The HFT bought each share from one seller and immediately sold it to one buyer; their optimal holding time is two round trips to the exchange. If the seller and buyer were both in market within a fraction of a second of each other and the trade would have gone through anyway, the HFT isn't adding any liquidity but parasitically attacking a flaw in the way the exchange matches and…

Part of what I am saying is that there isn't much room to do that. Take some publicly traded company and examine their order book. For any company with decent volume, the bid ask spread will likely be $0.01. For companies with less volume, buyers and sellers won't waltz into the market at the same second.

Here's an exciting company with a spread of $0.01 (at the moment anyway):

http://finance.yahoo.com/q/ecn?s=WEC+Order+Book

My selection criteria was to try to find a S&P 500 component that I wouldn't expect to be among the most highly traded S&P 500 components.

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