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New stock market for long-term investors/reducing high-frequency trading

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Re: New stock market for long-term investors/reducing high-frequency trading

#31

Post by yummyfajitas »

tptacek wrote: post #24
klochner wrote: post #20

Earlier quoted context omitted.

Not as a result of trading. You can argue that getting equity pricing right helps companies with their access to capital, but once you have the pricing right at 100ms I don't understand what value HFT firms are adding by pouring money and talent into getting the pricing right at 10ns. It seems like such an obvious win for society to mitigate the winner-take-all incentive of being first to market on a pricing disparit…

That's slippery slope logic. If the pricing is right at 1s, why pour money and talent into getting it right at 100ms? What's the win to society to "mitigate" an "incentive"? Is the problem volatility? Other forces create huge volatility. Should we penalize anything that creates volatility? Maybe we should end all program trading? Meanwhile, you're effectively vouching for a comment that models the markets as a closed…

What's the win to society to "mitigate" an "incentive"?

The main incentive is reducing time and energy devoted to a zero sum game.

A hypothetical: imagine a sunken pirate ship is discovered. Now suppose 10 crews of divers get into a race to retrieve the pirate gold. It's useful to society to bring up the gold. It might be useful to society to have a race between 2 crews to bring up the gold, to make sure the first crew doesn't dilly dally. The gain to society is $GOLD - 2 x $DIVER_COST, or perhaps $GOLD_AFTER_LONG_DELAY - 1 x $DIVER_COST. On the other hand, having 10 crews of divers all competing for the gold is pointless - the gain to society is $GOLD - 10 x $DIVER_COST, which is 8 x $DIVER_COST less than if 2 diver crews chased the gold.

HFT is basically the same situation as the race for pirate gold - a lot of smart people in a race to create a fixed amount of alpha. We might be better off if they were creating new alpha elsewhere instead of all simultaneously chasing after the same alpha.

(That's not to say I'm advocating a ban on HFT on this ground. A certain amount of effort devoted to HFT is certainly a good thing, and I doubt the government would get things right. I just don't think the market is getting things perfect either.)

Re: New stock market for long-term investors/reducing high-frequency trading

#32

Post by klochner »

tptacek wrote: post #24
klochner wrote: post #20

Earlier quoted context omitted.

Not as a result of trading. You can argue that getting equity pricing right helps companies with their access to capital, but once you have the pricing right at 100ms I don't understand what value HFT firms are adding by pouring money and talent into getting the pricing right at 10ns. It seems like such an obvious win for society to mitigate the winner-take-all incentive of being first to market on a pricing disparit…

That's slippery slope logic. If the pricing is right at 1s, why pour money and talent into getting it right at 100ms? What's the win to society to "mitigate" an "incentive"? Is the problem volatility? Other forces create huge volatility. Should we penalize anything that creates volatility? Maybe we should end all program trading? Meanwhile, you're effectively vouching for a comment that models the markets as a closed…

   That's slippery slope logic. If the pricing is right at
   1s, why pour money and talent into getting it right at 
   100ms?
I'm saying there are negative externalities[1], which are known to cause market inefficiency. Negative externalities typically look like "slippery slope" arguments, when in reality there is an appropriate level of penalty/tax/etc that restores efficiency.

   Meanwhile, you're effectively vouching for a comment 
   that models the markets as a closed system of people 
   dividing up a single pot of money. Isn't it plain that 
   such a model is wrongheaded?
I'll concede it's not zero-sum, but surely you also will concede diminishing returns to liquidity. I'll also concede that my original "money sink" comment was hyperbolic & inflammatory.

[1] http://economics.fundamentalfinance.com/negative-externality...

Re: New stock market for long-term investors/reducing high-frequency trading

#33

Post by cjeane »

AndyParkinson wrote: post #22

Am I the only one who thinks this is pointless? I don't trade billions of dollars of equities, but I am a long-term investor. One of my big rules as a long-term investor is that I can't sweat the 1/8ths and 1/4ths (borrowed from Philip Fisher). The time I spend worrying about these high frequency traders getting a few extra cents out of me is time wasted finding great companies that are selling at a discount. Sure...…

'Uh, no. No, you don’t understand. It’s uh– it’s very complicated. It’s uh– it’s aggregate, so I’m talking about fractions of a penny here. And, uh, over time they add up to a lot.' -Peter Gibbons

Re: New stock market for long-term investors/reducing high-frequency trading

#34

Post by tastybites »

andrew1 wrote: post #28
tastybites wrote: post #10

How can shares of a particular security have two different prices on two exchanges without a horde of very smart people rushing in to arbitrage?

Well, here's a situation where it can't happen: Exchange A: Price you can BUY ACME Co. = $34.50 Exchange B: Price you can BUY ACME Co. = $34.45 Exchange B: Price you can SELL ACME Co. = $34.40 Exchange A: Price you can SELL ACME Co. = $34.35

Sure, but what would the people paying more be getting? Less volatility? More assurance that their price is closer to long term averages? How is that possible?

Is this possible because the market maker ensures some kind of buffer from the HFT shops in exchange for a bigger spread?

I'm not in this field so I ask from ignorance.

Re: New stock market for long-term investors/reducing high-frequency trading

#35

Post by tptacek »

yummyfajitas wrote: post #31
tptacek wrote: post #24

Earlier quoted context omitted.

That's slippery slope logic. If the pricing is right at 1s, why pour money and talent into getting it right at 100ms? What's the win to society to "mitigate" an "incentive"? Is the problem volatility? Other forces create huge volatility. Should we penalize anything that creates volatility? Maybe we should end all program trading? Meanwhile, you're effectively vouching for a comment that models the markets as a closed…

What's the win to society to "mitigate" an "incentive"? The main incentive is reducing time and energy devoted to a zero sum game. A hypothetical: imagine a sunken pirate ship is discovered. Now suppose 10 crews of divers get into a race to retrieve the pirate gold. It's useful to society to bring up the gold. It might be useful to society to have a race between 2 crews to bring up the gold, to make sure the first cr…

So this argument makes a lot of sense, but you see that it's not the argument that's being employed against HFT in general, right?

What I see are a lot of people arguing that the HFTs are getting an unfair edge on other traders, as if some main street stock picker was actually in competition with an HFT prop trading shop.

My sense of it is that many of the people making this arguments believe that were it not for HFT's, people would have frictionless access to a real efficient price for any instrument they wanted to buy, when in fact they'd just be dealing with a much clunkier and less reliable set of middlemen.

Re: New stock market for long-term investors/reducing high-frequency trading

#37

Post by yummyfajitas »

tptacek wrote: post #35
yummyfajitas wrote: post #31

Earlier quoted context omitted.

What's the win to society to "mitigate" an "incentive"? The main incentive is reducing time and energy devoted to a zero sum game. A hypothetical: imagine a sunken pirate ship is discovered. Now suppose 10 crews of divers get into a race to retrieve the pirate gold. It's useful to society to bring up the gold. It might be useful to society to have a race between 2 crews to bring up the gold, to make sure the first cr…

So this argument makes a lot of sense, but you see that it's not the argument that's being employed against HFT in general, right? What I see are a lot of people arguing that the HFTs are getting an unfair edge on other traders, as if some main street stock picker was actually in competition with an HFT prop trading shop. My sense of it is that many of the people making this arguments believe that were it not for HFT…

I know this is an uncommon argument against HFT - I've only heard Tyler Cowen pushing this argument, but it's the one I find most plausible.

As I said, a certain amount of HFT is a good thing. If I thought it was harmful, I'd quit my job as an HFT programmer and find something else [1]. I'm just pointing out that there are costs, which don't necessarily outweigh the benefits after a certain point.

[1] This was a major reason why I quit my job as a postdoc, rather than trying to become a professor. I believe college is mostly rent seeking and I don't feel it's right to participate in that.

Re: New stock market for long-term investors/reducing high-frequency trading

#38

Post by tptacek »

yummyfajitas wrote: post #37
tptacek wrote: post #35

Earlier quoted context omitted.

So this argument makes a lot of sense, but you see that it's not the argument that's being employed against HFT in general, right? What I see are a lot of people arguing that the HFTs are getting an unfair edge on other traders, as if some main street stock picker was actually in competition with an HFT prop trading shop. My sense of it is that many of the people making this arguments believe that were it not for HFT…

I know this is an uncommon argument against HFT - I've only heard Tyler Cowen pushing this argument, but it's the one I find most plausible. As I said, a certain amount of HFT is a good thing. If I thought it was harmful, I'd quit my job as an HFT programmer and find something else [1]. I'm just pointing out that there are costs, which don't necessarily outweigh the benefits after a certain point. [1] This was a majo…

Hey for whatever it's worth, if HFT funds the training of entrepreneurial programmers in markets programming, that's probably a benefit.

Re: New stock market for long-term investors/reducing high-frequency trading

#39

Post by yummyfajitas »

tastybites wrote: post #34
andrew1 wrote: post #28

Earlier quoted context omitted.

Well, here's a situation where it can't happen: Exchange A: Price you can BUY ACME Co. = $34.50 Exchange B: Price you can BUY ACME Co. = $34.45 Exchange B: Price you can SELL ACME Co. = $34.40 Exchange A: Price you can SELL ACME Co. = $34.35

Sure, but what would the people paying more be getting? Less volatility? More assurance that their price is closer to long term averages? How is that possible? Is this possible because the market maker ensures some kind of buffer from the HFT shops in exchange for a bigger spread? I'm not in this field so I ask from ignorance.

You can't pay more - it's illegal (see RegNMS). You must buy on exchange B before buying on exchange A.

Re: New stock market for long-term investors/reducing high-frequency trading

#40

Post by andrew1 »

borism wrote: post #36

Doesn't Credit Suisse have pretty active HFT desk? Just another way to shaft their own customers, isn't it?

They're not shafting anyone, no one will be obliged to trade on this market. People are only going to trade on it if they believe they'll gain some advantage through doing it - so conversely you could argue that by offering this service Credit Suisse are doing their customers a favour.
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