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What Business is Wall Street In?

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Re: What Business is Wall Street In?

#121

Post by plc »

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…

What are you talking about? If a non HFT buyer/seller both want to buy/sell at 20, then they will go to the market and that will happen. In fact, that happens all the time.

This is precisely the point about HFT. If you are a seller, there isn't always a buyer. HFT is there when there ISN'T the other side. The scenario you described is absurd. How often do a buyer / seller want to interact within the same millisecond?

They can of course. HFT does nothing to stop that. Two people can trade in the open market with each other whenever they want. The reason most of the time HFT is involved is HFT gives the best price. That's why it's become so big. They provide the best price to their customer, not attacking some "flaw" in the exchange.

Re: What Business is Wall Street In?

#122

Post by josephlord »

its_so_on wrote: post #98
josephlord wrote: post #94

Earlier quoted context omitted.

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 m…

I agree with the logic but let me propose some additional benefits/reasons to do it yourself.

Freedom from responsibilities to others (employees, investors) could allow creativity.

Singular vision for the product without compromise.

No need to describe requirements to others.

Get a basic understanding of all areas while it is fairly simple before scale up (accounting etc.).

Also the pure logical case only really works when you have enough cash to invest yourself in building the business or you would have to put the effort into finding and managing investors.

The low quality version might actually be a good investment in the shift it makes in the external perception of value is sufficient.

Re: What Business is Wall Street In?

#123

Post by plc »

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…

Mutual funds do buy HFT services in executing their long term investments...they do so by going to the open market, where HFT dominates. They pay HFT services by paying the typical 1 cent spread.

One of the greatest examples of how nothing nefarious is going on is from a large multi billion dollar hedge fund I used to work at. They have both an equity investment group, as well as a HFT equity liquidity providing platform. I worked on HFT, and knew the equity guys. They always wanted to execute with us in the open market. It was so much better than what they used to have to do.

Why would one of the most sophisticated equity investors in the world want to run an operation that "skims" from the other? Because that's not what HFT does, and of course they know that. They use their own product (their HFT system) to execute their own buy orders. If that's not a testimonial, I don't know what is.

Re: What Business is Wall Street In?

#124

Post by zerostar07 »

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…

Assuming that in the future most trading will be done by computers, this means that in a large part the market will be deterministic, or at least predictable, but not rational or contributing to a better economy. The whole idea of stock markets is to have people apply their sensibility so that the economy moves towards what will be "a better future". Since only people know what is good for them, and 'good' is not possible to define as a specific set of optimization problems, i don't see what is the value of an automatically-trading market.

Re: What Business is Wall Street In?

#125

Post by icelancer »

marcamillion wrote: post #109
patio11 wrote: post #5

It 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…

seeking alpha is a sucker's bet. Surely this can't be right. If for the only reason that, if it were a sucker's bet, then most people wouldn't take it. Especially most 'informed/rational' actors. The vast majority of the players on Wall Street, we can assume, are informed and relatively rational. Yes, they may follow the herd - but that too is a rational exercise. If you are in a building and everybody is running for…

>If for the only reason that, if it were a sucker's bet, then most people wouldn't take it.

The market can remain irrational for longer you can remain solvent.

Re: What Business is Wall Street In?

#126

Post by tptacek »

lifeisstillgood wrote: post #63
PaulHoule wrote: post #15

Earlier 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…

I think everyone supports market making. And market makers should take a reward for holding onto a stock (even for a short period of time) But the benefits of market making tail off with frequency - would you mind waiting another hour for a deal at 518 or even a whole day? To a trader its unacceptable, to an investor, its a coffee break. But what drives HF trading is trading - as markets become more efficient trading…

A lot of people support "market making", but then talk about frontrunning trades in situations that are morally and technically equivalent to market making. Computer nerds tend to assume the role of "market maker" is more formally defined than it really is. Really, there are just liquidity sellers and liquidity buyers.

Re: What Business is Wall Street In?

#127

Post by RockyMcNuts »

uptown wrote: post #11
patio11 wrote: post #5

It 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…

The market has changed because there are a lot of imbalances that make expected returns bimodal. For instance, either the euro is going to implode, or it's not. Either there's going to be a recession due to [insert Europe/China/Japan/Middle East] or there's not. So in the short run returns might depend on the perceived likelihood of catastrophe (risk-on/risk-off).

Also, with interest rates low, return expectations might have gotten low enough that the significant vig of Wall Street is a bigger problem for some strategies.

Re: What Business is Wall Street In?

#128

Post by RockyMcNuts »

marcamillion wrote: post #109
patio11 wrote: post #5

It 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…

seeking alpha is a sucker's bet. Surely this can't be right. If for the only reason that, if it were a sucker's bet, then most people wouldn't take it. Especially most 'informed/rational' actors. The vast majority of the players on Wall Street, we can assume, are informed and relatively rational. Yes, they may follow the herd - but that too is a rational exercise. If you are in a building and everybody is running for…

People bet on slot machines too. Can you say, if it were a sucker's bet, most people wouldn't take it?

When I started writing I thought if I proved X was a stupid thing to do that people would stop doing X. I was wrong. - Bill James

For some measure of 'sucker-value', seeking alpha is a sucker's bet, or timing the market is a sucker's bet, or blackjack is a sucker's bet, or poker is a sucker's bet. But there are the few who can find an edge, and don't play when they don't.

A more nuanced point of view is that the market is efficient enough and perverse enough that it takes an unusual ability to find alpha, or time the market, or to pursue any strategy. So if you don't have those, then it's a sucker's bet.

As a thought experiment, consider what would happen if (nearly) everyone indexed. Anything outside the index would be super-cheap and illiquid, and the index would be expensive in comparison. In that case, non-indexers would outperform. (Efficient market theorists would of course argue it was an illiquidity and risk premium and the market is still efficient.)

In the real world, the market finds an equilibrium between indexers and non-indexers where some can generate alpha, enough to persuade a lot of people that they're alpha generating when they are just fooling themselves. It's really people's ability to rationalize and fool themselves that explains the persistence of alpha-seeking strategies, not their success.

Paradoxically, when dumb money acknowledges its limitations, it ceases to be dumb. - Warren Buffett

I agree with you that it's possible, but hard to outperform, but mostly for a different reason. Partly because the market is somewhat efficient and rational, but mostly because where and when it's irrational, it inherently mirrors the irrationality of the human participant in ways which almost everyone will struggle in vain to overcome.

Re: What Business is Wall Street In?

#129

Post by ISL »

rhizome wrote: post #113
BenoitEssiambre wrote: post #85

Earlier quoted context omitted.

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.

Tried it. Only found ursine mauling.

Tried duckduckgo too. Got tired of scrolling.

Re: What Business is Wall Street In?

#130

Post by wglb »

tptacek wrote: post #126
lifeisstillgood wrote: post #63

Earlier quoted context omitted.

I think everyone supports market making. And market makers should take a reward for holding onto a stock (even for a short period of time) But the benefits of market making tail off with frequency - would you mind waiting another hour for a deal at 518 or even a whole day? To a trader its unacceptable, to an investor, its a coffee break. But what drives HF trading is trading - as markets become more efficient trading…

A lot of people support "market making", but then talk about frontrunning trades in situations that are morally and technically equivalent to market making. Computer nerds tend to assume the role of "market maker" is more formally defined than it really is. Really, there are just liquidity sellers and liquidity buyers.

And are obligated to stay in the market and provide liquidity, no matter what the circumstances.
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