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What Business is Wall Street In?

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Re: What Business is Wall Street In?

#171

Post by makomk »

wglb wrote: post #130
tptacek wrote: post #126

Earlier quoted context omitted.

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.

Unfortunately, HFT firms playing at market maker don't actually have any obligation to stay in the market and provide liquidity. There are some people that want to see this changed (for example, I heard the head of the financial stability department at the Bank of England complaining about it on the radio the other day) but until then...

Re: What Business is Wall Street In?

#172

Post by Tycho »

I read an interesting claim in a book about economics recently: that Wall Street wasn't an industry, but a monopoly.

The argument was that in a normal industry, companies in competition with each other benefit when a competitor goes out of business. Other firms step in and snap up the opportunities. But with Wall Street, the whole network of companies needs a government bail out to stop their wholesale collapse when one company gets into trouble (eg. Bear Stearns, Lehman Brothers). Thus they are not really an industry of competing companies, but should be seen as a single monopolistic entity.

(of course they are filled with competitive people, but think of how departments and employees within the same company compete with each other)

Re: What Business is Wall Street In?

#173

Post by yummyfajitas »

prodigal_erik wrote: post #166
btilly wrote: post #162

Earlier quoted context omitted.

If you are able to afford to buy and hold, then it does not matter how long the markets stay irrational - you've bought it and it should work out. Where Keynes' rule applies in spades is when you are doing things like shorting an overpriced stock. Now as the price goes up you keep on having to put more money in, and should you run out of money you lose your shirt. And about poker, there are a lot of variants of poker…

Without dividends, there's no reward for buy-and-hold investing, and no reason to pick companies that will actually perform well. Instead anyone who buys is gambling that they'll be able to dump their position at a fortunate time, which leaves them dependent on predicting the irrational market's perception of the company's prospects.

Unfortunately dividends are double-taxed relative to cap gains/interest/etc. Until that's fixed, we won't go back to the era of companies returning money to investors.

Re: What Business is Wall Street In?

#174

Post by yummyfajitas »

makomk wrote: post #170
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…

The trouble is that that HFT is basically driving market makers out of business. Traditional market makers were obliged to continue trading even when the entire market had gone to shit, a service they could afford to provide thanks to their profits during normal market operations. The new breed of HFT firms that have displaced them don't do that, so as soon as the market goes a bit funny all the liquidity vanishes an…

You say "traditional", I think you mean "designated" (or "specialist"). Designated market makers also received certain privileges, but in turn are obligated to maintain an orderly market.

Historically, not all market makers were designated market makers.

Some HFTs (e.g. some branches of Goldman) do act as designated market makers, receive these privileges, and are obliged to continue trading. Others do not. Same as always, just with machines replacing people.

Re: What Business is Wall Street In?

#175

Post by tptacek »

arthurrr wrote: post #163
plc wrote: post #147

Earlier quoted context omitted.

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.

Zero Hedge was an excellent site in its early days before it became popular. Most of the good contributors have left the site, understandably. And Matt Taibbi was responsible for the legendary characterization of Goldman Sachs as a "great vampire squid wrapped around the face of humanity."

I'm having a very hard time responding to the idea that extraordinarily bad technical reporting on the trading markets is redeemed by colorful writing. Is he a journalist or a poet?

I get it: people like reading this stuff. That's why they write it that way. But I'm saying, like reading it or don't like reading it, a lot of the underlying facts being reported are laughable.

Re: What Business is Wall Street In?

#176

Post by tptacek »

lifeisstillgood wrote: post #154
tptacek wrote: post #151

Earlier quoted context omitted.

Liquidity costs money. It has buyers and sellers. Obviously, those aren't terms I'm making up. I know you're not making up "injector" either, but that term is less precise. If you want to sell at 505, an HFT can't change that. Place a limit sell at 505. If you're not willing to hold out for 505 and want to sell at the market price, you're a liquidity buyer paying a premium (of some sort) for getting out of the market…

Yes, the HFT assumes the risk, for it is acting as a Market maker. My point was that there already was a Market maker there - another is not more liquidity. Liquidity is a binary term IMO. Having two Market makers in same product does not make more liquidity it just makes liquidity cheaper. That might benefit the seller but makes no difference to the exchange function in the comics, when Superman is protecting Metrop…

Isn't the cost of liquidity its only reasonable metric? Anyone can be "liquid" if they're willing to take a sufficient hit on prices. In that sense, "just makes liquidity cheaper" is like saying "just makes more liquidity".

Re: What Business is Wall Street In?

#177

Post by tptacek »

lifeisstillgood wrote: post #169
dchichkov wrote: post #160

Earlier quoted context omitted.

Actually having two (or more) market makers benefits the market. Because a single market maker can pause or quit at any moment in time.

That's the same thing ... An extra Market maker provides no benefit apart from being able to easily prevent there being no Market maker Anyway makers have specialisms and get advantages from the exchange - they are not supposed to just bugger off home cos it's Tuesday

That's not true. An extra market maker provides the benefit of competing market makers, which should reduce the spread.

Most markets are not specialist markets. Specialists at the NYSE were accused of skimming hundreds of millions of dollars from customers. They're an anachronism and a much more disquieting idea than robots competing to provide the best price --- which is pretty much what most HFT systems do.

Re: What Business is Wall Street In?

#178

Post by Ntrails »

lifeisstillgood wrote: post #155
paulsutter wrote: post #153

Earlier quoted context omitted.

He's making a distinction between trading and investment. The purpose of the stock market is raising capital to start/grow/sell companies (investment). The technical term for high frequency trading is "scalping" (yes, exactly the same word and meaning as ticket scalping). HFT traders like to think they "create liquidity", but I haven't heard a credible argument to support that. Divide the market into three categories…

My view (possibly wrong, it has been known) is that liquidity need only be provided by one party. A competitive Market in liquidity has minimal benefits it is unimportant if the Market maker holds for 1 pixo second or one month - what matters is that someone is there to trade. Now HFT is at a disadvantage as they have less scope to make their spread (essentially the other side must already be in the Market) but that'…

"I am conjecturing that there are minimal benefits to an exchange to having more than one Market maker at a given stock within a given price range."

Could you perhaps explain the downside of having multiple market makers per stock? It seems trivial to state that competition in providing liquidity alters the cost of said liquidity and disprove your contention - but why bother to make that argument when there can't really be additional costs by multiple parties competing to offer a service?

Re: What Business is Wall Street In?

#179

Post by wglb »

makomk wrote: post #171
wglb wrote: post #130

Earlier quoted context omitted.

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

Unfortunately, HFT firms playing at market maker don't actually have any obligation to stay in the market and provide liquidity. There are some people that want to see this changed (for example, I heard the head of the financial stability department at the Bank of England complaining about it on the radio the other day) but until then...

This is not true.

Some HFT firms have agreements with the exchanges that require them to be in the market providing liquidity no matter what. This is not true of all HFT practitioners, but major key players are required to do so.

Re: What Business is Wall Street In?

#180

Post by yummyfajitas »

FJim wrote: post #134
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…

Force quotes to be in sixteenths, the way they used to be and HFT disappears.

This would dramatically increase the profits of HFT, and cause more people to do it.

http://www.chrisstucchio.com/blog/2012/hft_whats_broken.html

http://www.chrisstucchio.com/blog/2012/subpenny_rule_respons...

http://www.chrisstucchio.com/blog/2012/bigger_ticks_more_ren...

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