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High-Speed Trading Isn't About Efficiency—It's About Cheating

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Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#111
post #72

Earlier quoted context omitted.

Traders are already taxed. They make money from their trades and pay income taxes on this trading. If, however, you tax the trading itself, there will be less of it, significantly less and, most likely, the total taxes collected will decrease

This argument seems to apply equivalently to VAT/sales tax, which in my mind makes it weak. (Consumers are already taxed on their income etc) There's no reason to believe total taxes collected will decrease. If actors still benefit from HFT post-taxation, they will still trade, and pay the tax.

Sorry but you are clueless. Taxing the trading itself will raise the cost of trading, this making it less profitable if it is less profitable people will do less of it.

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#112
post #66
post #27

Earlier quoted context omitted.

the stock exchanges recognize this value and provide co-location etc to enable it Not true. The exchanges charge hefty fees to colo in their datacentre. What you do with it is completely up to you. It's just more revenue as far as the exchange is concerned. why are so many stock exchanges closed for half to two thirds of the day In practice, this doesn't matter. When NYC closes, trading moves to Tokyo, then onto Lond…

You say you can trade around the clock by trading around the globe. But a position in New York can't exactly be liquidated in Tokyo. You can hedge for an approximation, but then you have cost of carry. Most markets are also completely closed on Sunday. It's not obvious to your parent why this should be. And don't even mention the half-day for stocks in the US around Thanksgiving, which is just silly.

Important things are 24 hours a day. Spot and forward FX, commodities, sovereign bond futures, Equity index futures, etc. See for example:

http://www.cmegroup.com/trading_hours/

CME tends to be closed for an hour a day for cleanup and that's it. US equities aren't a big deal compared to the size of bond or FX markets.

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#113

Earlier quoted context omitted.

I worked in the industry for a little while. At this point, some companies depend on having that daily downtime. Their whole development is based around the fact that they will have guaranteed downtime. It's built right into their software stack. Trying to fiddle with this expected downtime would throw (parts of) the industry into turmoil. It's just a historical quirk, but it's probably here to stay.

Surely there are ways to get rid of it without the transition being so traumatic. For example, the change could be announced a few years prior, and the downtime could go down by an hour per year.

Going to a continuous cycle will end techniques like "banging the close". That would be disruptive.

>the downtime could go down by an hour per year.

Just my opinion but I think that would just increase the pain and complexity of the transition.

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#114
post #72

Earlier quoted context omitted.

Traders are already taxed. They make money from their trades and pay income taxes on this trading. If, however, you tax the trading itself, there will be less of it, significantly less and, most likely, the total taxes collected will decrease

This argument seems to apply equivalently to VAT/sales tax, which in my mind makes it weak. (Consumers are already taxed on their income etc) There's no reason to believe total taxes collected will decrease. If actors still benefit from HFT post-taxation, they will still trade, and pay the tax.

VAT is paid on the difference between what you obtained a good/service for and what you sold it on at. The clue is in the name - "value added". You can even get a refund if you make a loss. A transaction tax would be charged at both ends whether or not you make a profit.

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#115
post #92
post #7

A few immediate thoughts: Transaction volume is ultimately not the important metric--revenue is. And, following [1], it seems that the total revenue for HFT was probably around $2Billion in 2013--for a whole industry, that's not very much! Measuring transaction volume is akin to comparing shipping between Amazon and Walmart ignoring the fact that Amazon ships directly to consumers while Walmart mostly ships to large…

> "...increasing liquidity is the last refuge of bullshitters" is not an argument--it's an assertion. I believe it's technically an observation, a claim that in the writer's experience, bullshitters fall back on that argument. It's true that he didn't explicitly give evidence for that, but expecting writers to justify every single statement in a short piece that is one of many they write on a topic is another refuge…

On the contrary, the idea that HFT increases liquidity is pretty much obvious if you think about it. It's the assertion of the opposite that needs extraordinary proof, and since the author doesn't provide anything at all, he sounds like a bullshitter to me.

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#116

I assume folks who advocate for a transaction tax don't actually want less transactions, rather they want more "real" transactions and a less artificially volatile market place. Unfortunately, a transaction tax would create the exact opposite of that situation. The hypothesis that if there were a transaction tax there would be less transactions is incorrect. What would happen is that transaction quantities would get…

We actually have a system similar to what you describe in your last paragraph with the three "inverted" US equity exchanges where liquidity providers pay a fee and liquidity takers receive a rebate. It means that shares posted to the inverted exchanges are cheaper (net of fees) to aggressors than shares posted to other exchanges, so liquidity takers with a smart order router will look first to the inverted exchanges before the other exchanges.

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#117
post #6

Earlier quoted context omitted.

> Damned if they do, damned if they don't I guess. Why can't the two be bad in their own way? It's like the mob switching from extortion to burglary, and saying, what, you didn't want us threatening people so we're not – now we're just stealing; what more do you want from us? I guess it's damned if we do, damned if we don't...

How is market makers aggressively competing for positions bad?

It's not "let's take over the world" bad, it's just a lot of effort expended on something that's of little value. Working a lot towards something that isn't any good could be thought of as a kind of bad.

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#118
post #117

Earlier quoted context omitted.

How is market makers aggressively competing for positions bad?

It's not "let's take over the world" bad, it's just a lot of effort expended on something that's of little value. Working a lot towards something that isn't any good could be thought of as a kind of bad.

Yes but what are the unintended side effects & are they worse than what you are curing? Removing the pits in exchange for electronic trading is a huge win. It's unclear how to keep that win & skincare hft.

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#119
post #92

Earlier quoted context omitted.

> "...increasing liquidity is the last refuge of bullshitters" is not an argument--it's an assertion. I believe it's technically an observation, a claim that in the writer's experience, bullshitters fall back on that argument. It's true that he didn't explicitly give evidence for that, but expecting writers to justify every single statement in a short piece that is one of many they write on a topic is another refuge…

On the contrary, the idea that HFT increases liquidity is pretty much obvious if you think about it. It's the assertion of the opposite that needs extraordinary proof, and since the author doesn't provide anything at all, he sounds like a bullshitter to me.

You are seriously suggesting that a professor of finance who specializes in studying high-frequency trading is just bullshitting? In a 60-page academic paper on his area of professional expertise? And your view is based on nothing other than the causal intuition of an anonymous commenter called "tutufan"? Gosh, color me convinced.

Yes, market participants on average increase liquidity. Which is why you have that intuition. But it isn't specifically true in all cases. For example, take a simple commodities market where buyers and sellers show up in person to trade wheat. Farmers show up to sell; flour-makers show up to buy. With me so far?

If I place people on the main roads into town and have them buy up all the grain before it reaches the market, I will be reducing market liquidity, because anybody who needs wheat will be totally fucked unless I decide sell to them.

Re: High-Speed Trading Isn't About Efficiency—It's About Cheating

#120
post #69
post #59

Earlier quoted context omitted.

Kinda. A few points to help clarify things: All funds that go into the business will either be debt or equity. Debt gets a guaranteed rate of return, and needs to be paid back. It gets first claim if you go under, but gets no "bonus" if you do well. Equity is an ownership stake; last in line if you go under, but with a claim on all future profits if you do well. The most obvious type of equity stake is your own, but…

> If you owe 0.0001% of Amazon, you have the right to 0.0001% of all future profit they make. That totally makes sense for stocks that pay dividends, but how do you claim your 0.0001% of profits for stocks that don't?

There's two approaches to this:

Approach A: If I own 100% I would clearly get 100% of all future profits. If I owned 50% (ie, if this was a joint venture between me and my friend Joe), then...I'd have a claim to 50% of all future profits. By extension, X% of ownership gives a claim to X% of the future profits. Your share of Amazon may be tiny, but if someone wanted to buy Amazon outright, they'd need to buy your share; the value of that share to the potential buyer is proportional to the value of Amazon as a whole.

Approach B: Every dollar of profit that Amazon makes is either paid out in dividends, or is retained and re-invested in order to garner future profits. The same is true for future profits. However, all things are finite, so at some point the company will be wound up and liquidated; any profits that have not been disbursed to shareholders via dividends will be disbursed at this time. Ergo, every dollar of profit is eventually disbursed to shareholders.

(Ah, you say, but it might be a decade or more before Amazon pays dividends or is wound up. But when you go to sell your shares, the same analysis holds, recursively. Your share of Amazon has value because you can sell it to someone who will buy it because they can sell it to someone who will buy it because [...] they want a share of Amazon's future dividends.)

Or to put it another way: A company has assets and liabilities; if you net these out (ie, sell off all the assets and pay off all the liabilities) you get a "book value". But a company almost always is valued at well above its book value: Amazon at 17 times book value. In other words, it would cost you 17 times more to buy Amazon than it would to just build an exact replica of all their warehouses and infrastructure (and patents, and brand awareness, and goodwill, etc.). Why? What do you buy when you launch a hostile takeover of Amazon other than all those assets? Answer: Their future profits. That's the only thing left to have value.

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