What Business is Wall Street In?

What makes you think increasing the tick size would help? HFT would still be at the front of every book, except in larger quantities now. Most people support MORE decimalization than less.

Sigh, I like Mark Cuban, its fun to watch him on Shark Tank but I don't think he makes a good case here. The financial markets have several ways in which people use and/or exploit them. One of the ways people use the stock market is for investing, one of the ways they use the market is for 'trading' which for all intents is extracting value out of the first (or second) derivative of market trades.

An analogy (weak but serviceable) is that a home town bank is for "saving money", you save your money, you deposit, you write drafts against your deposits that other people can use to make value limited withdrawals. Oh and the people in the bank? They also have a business where they take your deposits and they loan that to people who need money now and can repay it in the future. But to do that they have to do 'magic math' and figure out how likely it is that this borrower will pay it back and they do that with an interest rate. Now the bank, like it has from the beginning of time, is "making money using your money and dealing with people who will pay to borrow it."

Interestingly this exact same works on Wall street and with 'investment banks'. You "invest" (equivlaent to making a deposit) and instead of a chit that says you have $1000 on deposit you get one that says you have ownership of 50 shares of stock in AT&T. Guess what, the bank doesn't just sit on a bunch of stock certificates, they have another business where they let other people use those shares on the agreement they can always get back 50 shares to give to you if you decide you want the certificates to put in a safe deposit box or something. One customer is 'investing' and one (possibly different) customer is 'trading'.

Guess what you can do this with anything of value, and if its something someone consumes you call it "commodities", if its currency you call it "banking", if its stocks and bonds you call it "investing", and if its gossip you call it "journalism."

Mark is smart enough to know this, so why the blog post?

My guess is that a lot of people don't like high-frequency-trading because they can't afford to play. What has happened is that a large holding company, fund, or bank with programmers and computers and data center space near the exchange can easily out trade someone trying to do this through the e-trade Web API. I get how that could be annoying to someone who used to make money that way, tell it to all the folks who used to be able to make a class A game title with a couple of programmers and an artistically inclined person or two.

Exactly. And we should just stop calling them "Value" investors. This is true for growth investors, any kind of investors, in fact all investors.

Investing is about knowing the difference between value and the price.

When you can do that-- and when I say "knowing" I mean it, and I have a spreadsheet to calculate it-- then you can buy low and sell high.

The problem is wall street is in the business of managing other people's money and most people are ignorant of money, so you have a lot of people who just turn their money over to others to "manage"... and many of those that use other people's money end up gambling with it rather than investing it... this problem is compounded by the moral hazard created by the government bailing these companies out when the gambles turn south (or underwriting the gambling by buying bad securities as helicopter ben is doing right now to the tune of $40B a month.)

The problem with wall street is government regulation which is idiotically designed, and intervention-- in the form of bailouts-- that perverts the entire system incentivizing gambling.

And the people voting for all this, generally don't even know what money is, let alone how to invest it. (If you think the dollars in your pocket are money, then you're one of those people, and I suggest you read http://mises.org/money.asp )

Agreed, those blogs/publications are horrendous. Just factual stuff that is wrong all over the place. I wouldn't mind if people had concerns, as long as they realize it's a very complicated subject, so maybe they should ask questions, instead of making stupid assertions that are clearly false and try to sound like experts in a subject they've thought about for 10 minutes.

Without any regards to the stocks they are trading? Ironically, Mark Cuban shoots himself in the foot here when he complains about macro events dominating micro events.

It turns out to price an asset, like a stock, a wide variety of skills is needed. Some people focus on macro trends, like analyzing political events, oil prices, etc. Some people talk to management of the company, count cars at Wal Mart, etc. These are the micro trends.

And some people try to estimate the current supply and demand for a certain stock. That is what HFT does. So yes, it has "regards to the stocks they are trading." Just different regards. That's why specialization works so well. HFT worries about current supply/demand issues, and tries to estimate a fair price to set the market so that when the average investor comes in, and looks at a stock with a 1 cent spread, he is going to get a fair price. Over the long term, people who analyze micro and macro factors will trade with HFT, which will then force the algorithms to change the stock price to reflect their views.

Is an arms race to shave milliseconds off of trading times the most important thing in the world? Absolutely not. But is gaming the Apple app store to get your mobile app higher in the rankings any different? At least with HFT, milliseconds do matter in more situations than you can imagine. If one day you buy a stock that had bad news announced just milliseconds before, and HFT did not update that quickly so you paid a price way, way too high, you would be upset. Again, not the most important thing in the world but it does help.

The millisecond thing is highly overrated. Anyone in the industry knows that it only matters to a small degree…understanding supply demand and adjusting accordingly is the most important skill. That's why the most profitable high frequency firms don't care about what millisecond they execute in…that is one of the great ironies of this--you guys are concerned about something that not many other people who actually do this for a living are concerned about. But you guys latch on this minor point as the major one, and that is a mistake. Do developers worry about how quickly their apps load? Yes. Does it mean their product will be a success? Not necessarily. That is the same thing here. HFT shops work to make sure they aren't too behind, but focusing on that aspect is just trivial compared to the actual work they do.