Algorithmic trading -- the positive side
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Algorithmic trading -- the positive side
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Re: Algorithmic trading -- the positive side
#2"The conclusion, then, is that algorithmic trading (at least in the time period studied, in which stocks were generally rising) does improve market efficiency in the sense of higher liquidity and better price discovery."
Re: Algorithmic trading -- the positive side
#3"The conclusion, then, is that algorithmic trading (at least in the time period studied, in which stocks were generally rising) does improve market efficiency in the sense of higher liquidity and better price discovery."
But the paper also rightly ends with a further caveat:
While we do control for share price levels and volatility in our empirical work, it remains an open question whether algorithmic trading and algorithmic liquidity supply are equally beneficial in more turbulent or declining markets.
Re: Algorithmic trading -- the positive side
#4"The conclusion, then, is that algorithmic trading (at least in the time period studied, in which stocks were generally rising) does improve market efficiency in the sense of higher liquidity and better price discovery."
Ah,
But is it real liquidity or the illusion of liquidity?
Liquidity is, more or less, money ready to be invested.
The question of whether sophisticated strategies really provide this is complex, like the strategies themselves. If you want background, I think Doug Noland's Credit Bubble Bulletin has done a good job of addressing these questions over the years.
At the same time, I think we can see simple things. The big question isn't day-to-day-liquidity but liquidity-when-you-need it. By that measure, when we look at recent and older wild-swings in the market and especially the "flash crash", it seems fairly evident that the spectrum of "sophisticated strategies" don't provide liquidity-when-you-need-it and that is increasingly a problem.
Re: Algorithmic trading -- the positive side
#5My understanding of liquidity in the stock market is that it refers to being able to quickly sell stock, and minimally affect the price of said stock by the sale.
I see the value of the former, having an asset you can't sell means its value is rather pointless, but I'm not sure I seed the point of the latter. Isn't money made in the stock market by price volatility? Doesn't algorithmic trading simply smooth out price fluctuations to the point that individual traders receive nothing, while HFT houses skim immense numbers of tiny slivers?
It seems to me that we're moving toward the future that some people want: that we only invest in companies which we believe have real growth or dividend payout potential over the long term. Meanwhile, money will continue to be made by "gambling" on price fluctuations, but only by high frequency traders.
I can't help thinking that liquidity has diminishing returns, and I definitely think that claims of HFT value are heavily undermined by their tendency to drop out of the market during crashes.
If I'm wrong in these views, I would love to be enlightened.
Re: Algorithmic trading -- the positive side
#6My understanding of liquidity in the stock market is that it refers to being able to quickly sell stock, and minimally affect the price of said stock by the sale. I see the value of the former, having an asset you can't sell means its value is rather pointless, but I'm not sure I seed the point of the latter. Isn't money made in the stock market by price volatility? Doesn't algorithmic trading simply smooth out price…
> having an asset you can't sell means its value is rather pointless
Not completely. There are still dividends. (Or being able to live in a house, or rent it out, if we are talking about real estate assets.)
Re: Algorithmic trading -- the positive side
#7"The conclusion, then, is that algorithmic trading (at least in the time period studied, in which stocks were generally rising) does improve market efficiency in the sense of higher liquidity and better price discovery."
But the paper also rightly ends with a further caveat: While we do control for share price levels and volatility in our empirical work, it remains an open question whether algorithmic trading and algorithmic liquidity supply are equally beneficial in more turbulent or declining markets.
Its pretty much a tax; take out all the day traders and whether you gain or lose due to the spread is more or less random; day traders and hft traders narrow the spread, but since whether you gained or lost was random and they are now capturing a piece of that spread, they (err, ashamedly, we) are basically just taxing everyone.
A nominal transaction tax would eliminate most of the ultra-high frequency stuff and could be put to better use. Volumes would drop and spreads would widen, but it wouldn't really matter up to some reasonable amount.
Re: Algorithmic trading -- the positive side
#8"The conclusion, then, is that algorithmic trading (at least in the time period studied, in which stocks were generally rising) does improve market efficiency in the sense of higher liquidity and better price discovery."
But does higher liquidity lead to more efficient allocation of capital? Or does it only lead to more productive markets up to a certain threshold?
Re: Algorithmic trading -- the positive side
#9My understanding of liquidity in the stock market is that it refers to being able to quickly sell stock, and minimally affect the price of said stock by the sale. I see the value of the former, having an asset you can't sell means its value is rather pointless, but I'm not sure I seed the point of the latter. Isn't money made in the stock market by price volatility? Doesn't algorithmic trading simply smooth out price…
Doesn't algorithmic trading simply smooth out price fluctuations to the point that individual traders receive nothing, while HFT houses skim immense numbers of tiny slivers?
Yes. Good speculation smooths out price fluctuations to the point that bad speculators receive nothing, while good speculators receive all the alpha. This is true not only of HFT, but of any good strategy.
...claims of HFT value are heavily undermined by their tendency to drop out of the market during crashes.
If you don't want HFT and other speculators to drop out of the market during crashes, don't break trades after the fact.
During a crash, most HFT's should make money hand over fist. But if the market centers break trades, HFT's are in danger of stabilizing the market and being heavily penalized for it.
I.e., if an HFT pushes accenture up from $0.05 to $1.00 and sells at $35, following which accenture eventually goes up to $40, they run the risk of having their $1.00 buy trade broken. Then they are stuck with a short sale at $35, while the price of accenture went up to $40.
Re: Algorithmic trading -- the positive side
#10Earlier quoted context omitted.
But the paper also rightly ends with a further caveat: While we do control for share price levels and volatility in our empirical work, it remains an open question whether algorithmic trading and algorithmic liquidity supply are equally beneficial in more turbulent or declining markets.
Its pretty much a tax; take out all the day traders and whether you gain or lose due to the spread is more or less random; day traders and hft traders narrow the spread, but since whether you gained or lost was random and they are now capturing a piece of that spread, they (err, ashamedly, we) are basically just taxing everyone. A nominal transaction tax would eliminate most of the ultra-high frequency stuff and coul…
I'm not sure a nominal transaction tax would eliminate high frequency trading. HFT guys already pay fees to the exchanges and regulators. Either way, you're right, an increased fee would simply be passed to investors in the form of an increased spread.