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Apple and the risks of trading 29,000 times per second

tech.fortune.cnn.com

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Re: Apple and the risks of trading 29,000 times per second

#41

Post by pdovy »

Iv wrote: post #12
fleitz wrote: post #7

Earlier quoted context omitted.

Why should trading at that frequency be illegal? What is the optimal amount of trades per second one should be making? Once per second? Once per minute? Once per year? Even if there were such a number how could any bureaucrat ever arrive at the optimal frequency any particular market participant should be trading at?

Does the intrinsic value of a company change 29 000 times per second ? is this signal or noise ? Trading once per day and randomizing the order of trades would work nicely I think. There was a recent very good example of this concerning Apple : When Steve Jobs died, they kept the information secret and agreed with the stock exchange to suspend trading for a day. The time for everyone to think about what it meant for…

As others have pointed out below, the value of the company may change at a fast rate, however that is far from the only reason that you might see many deals in a short period.

One of the primary benefits that market makers (which are often HFT firms) provide is the efficient transfer of risk. That is to say, the value of the company may not change thousands of times a second, but the willingness of existing holders of that stock to continue to do so may change rapidly. Or similarly some participant may suddenly need a hedge and buy this stock because it has the correlation their looking for. This is all to say that there are valid reasons for buying and selling a stock that have no direct (but some indirect) relationship with the value of that company. This is not a game played by retail investors, but it's not just played by HFT firms either. Institutional investors (e.g., my 401k money) will also use financial products in this way.

Or put a completely different way, I may sell my Apple shares because I need the cash back to help pay for a downpayment on my house. Did I sell those shares because I think the value of the company has suddenly changed? No. There are a myriad of reasons participants may move in and out of a position.

Re: Apple and the risks of trading 29,000 times per second

#42

Post by crististm »

bloat wrote: post #26
crististm wrote: post #22

Earlier quoted context omitted.

I just like how they invent lingo to cover up their screw-ups. False print? Come on - Now if I want to describe the problem there is a name for it. And they made sure to mention it three times + one in the photo so I will remember it.

Right... because we don't have any jargon in the tech industry.

The jargon is for the insiders to speed up their communication.

Using the jargon with the outsiders is just short for BS.

Re: Apple and the risks of trading 29,000 times per second

#43

Post by EvilTerran »

anonymoushn wrote: post #38
EvilTerran wrote: post #27

Earlier quoted context omitted.

While it would make the spread larger, I disagree with your use of the word "just". It would have many other effects as well - for one thing, it'd make trades on small shifts in value (ie less than twice the sales tax) unprofitable. That would make HFT much less attractive at the ridiculous frequencies it happens currently, as you'd need to hold on to stock for longer for it to shift enough for the gross gain to exce…

That would make HFT much less attractive at the ridiculous frequencies it happens currently, as you'd need to hold on to stock for longer for it to shift enough for the gross gain to exceed the sales tax. This is true if for some reason the HFT wants to take liquidity on both sides of the trade. In reality, the HFT will probably add liquidity on both sides of the trade, making a profit equal to the true spread plus a…

I must admit to being a bit of a layperson when it comes to the dark arts of finance, so I may well be completely wrong.

I was mostly going off my recollections of my high school economics teacher saying something to the effect of "tax on a transaction reduces the market size - for example, tobacco & alcohol duties serve to reduce usage of both products".

Would that not apply for some reason when the product in question is stock trades?

Re: Apple and the risks of trading 29,000 times per second

#44

Post by anonymoushn »

EvilTerran wrote: post #43
anonymoushn wrote: post #38

Earlier quoted context omitted.

That would make HFT much less attractive at the ridiculous frequencies it happens currently, as you'd need to hold on to stock for longer for it to shift enough for the gross gain to exceed the sales tax. This is true if for some reason the HFT wants to take liquidity on both sides of the trade. In reality, the HFT will probably add liquidity on both sides of the trade, making a profit equal to the true spread plus a…

I must admit to being a bit of a layperson when it comes to the dark arts of finance, so I may well be completely wrong. I was mostly going off my recollections of my high school economics teacher saying something to the effect of "tax on a transaction reduces the market size - for example, tobacco & alcohol duties serve to reduce usage of both products". Would that not apply for some reason when the product in quest…

It's probably true that less trades would occur, and HFT profits would probably be reduced by this, but they would be able to mostly avoid paying the tax.

What follows is full of holes but is a mostly correct explanation of what I was talking about before.

Each venue maintains an "order book" for each security that trades on the venue. The order book consists of a number of standing orders, either orders to buy at $k or orders to sell at $j (k<j, with many distinct values of j and k). These orders which sit on the book because they do not have a counterparty are called "add liquidity." When you want to just execute the trade and you don't mind the spread, you place an order that crosses the spread and transact with the person who has the best standing order (selling for the least money or buying for the most money) of all the standing orders. This is called "take liquidity." My impression, which may not be correct, but which forms the basis for my previous response, is that the HFT industry primarily plays the add side right now and that most firms only take liquidity to close out positions when they are unable to close them out by adding liquidity.

Re: Apple and the risks of trading 29,000 times per second

#45

Post by ars »

anonymoushn wrote: post #44
EvilTerran wrote: post #43

Earlier quoted context omitted.

I must admit to being a bit of a layperson when it comes to the dark arts of finance, so I may well be completely wrong. I was mostly going off my recollections of my high school economics teacher saying something to the effect of "tax on a transaction reduces the market size - for example, tobacco & alcohol duties serve to reduce usage of both products". Would that not apply for some reason when the product in quest…

It's probably true that less trades would occur, and HFT profits would probably be reduced by this, but they would be able to mostly avoid paying the tax. What follows is full of holes but is a mostly correct explanation of what I was talking about before. Each venue maintains an "order book" for each security that trades on the venue. The order book consists of a number of standing orders, either orders to buy at $k…

What difference does that make? I'm really not following you. When they sell, or buy, they pay the tax. It makes no difference if they place a limit order or a market order.

The spread is just the difference in prices, it's not an extra fee that some pay and some don't. The only reason it even exists is that where the prices meet trades happen, so the prices never actually meet for long.

Re: Apple and the risks of trading 29,000 times per second

#46

Post by anonymoushn »

ars wrote: post #45
anonymoushn wrote: post #44

Earlier quoted context omitted.

It's probably true that less trades would occur, and HFT profits would probably be reduced by this, but they would be able to mostly avoid paying the tax. What follows is full of holes but is a mostly correct explanation of what I was talking about before. Each venue maintains an "order book" for each security that trades on the venue. The order book consists of a number of standing orders, either orders to buy at $k…

What difference does that make? I'm really not following you. When they sell, or buy, they pay the tax. It makes no difference if they place a limit order or a market order. The spread is just the difference in prices, it's not an extra fee that some pay and some don't. The only reason it even exists is that where the prices meet trades happen, so the prices never actually meet for long.

The tax becomes part of the spread. The spread is paid (in aggregate) by the participants who take liquidity to participants who add liquidity.

It's not that market-makers and HFTs would not be assessed the tax at all, it is that they would be paid more than enough to cover the tax by the people who cross the spread.

Re: Apple and the risks of trading 29,000 times per second

#47

Post by franticpedantic »

creamyhorror wrote: post #40
franticpedantic wrote: post #35

Earlier quoted context omitted.

I didn't downvote you, but you're wrong for a huge variety of reasons. Firstly and most importantly, the stock market is not zero-sum.I don't know why you think it is.Equities in companies ideally (and historically) grow in real value.This is basic common sense.If your friend sells you a stake in his company, you have an ad-hoc stock market (a buyer and a seller for company equity). Is one of you destined to lose in…

"Firstly and most importantly, the stock market is not zero-sum." It is, unless you have another definition of zero-sum. The talk about companies "growing in value" ignores the fact that the "value" is purely what the market will pay for those companies . If the market is a closed system, i.e. companies are not being listed or delisted, then the net profit made by buyers & sellers if all transactions were to be close…

No, your friend is not left holding the bag. He's left holding the money you paid him for the equity. You were the one in the red at first, but since the value of your stake could grow and pay you in dividends you overcame that loss. Both of you gained money - that's the point. He didn't even lose the opportunity for more money, because he needed the initial investment to even grow the company in the first place.

Here's the key point you're missing. In order for it to be zero sum, if you make a million dollars off of this company, he needs to LOSE a million dollars. Not the opportunity to make a million dollars, an actual million dollars. Clearly this does not happen. You are totally and entirely wrong here.

The market doesn't grow because new money flows in. This is mercantalism and your understanding of economics is hundreds of years old. The market grows because companies create REAL (not nominal) value that didn't exist before. I can explain this in more depth, clearly your financial friends aren't very good at their jobs (it's quite common).

The reason your oil trader friend agrees it's zero sum is because the futures market is zero sum. The stock market is not.

Re: Apple and the risks of trading 29,000 times per second

#48

Post by creamyhorror »

franticpedantic wrote: post #47
creamyhorror wrote: post #40

Earlier quoted context omitted.

"Firstly and most importantly, the stock market is not zero-sum." It is, unless you have another definition of zero-sum. The talk about companies "growing in value" ignores the fact that the "value" is purely what the market will pay for those companies . If the market is a closed system, i.e. companies are not being listed or delisted, then the net profit made by buyers & sellers if all transactions were to be close…

No, your friend is not left holding the bag. He's left holding the money you paid him for the equity. You were the one in the red at first, but since the value of your stake could grow and pay you in dividends you overcame that loss. Both of you gained money - that's the point. He didn't even lose the opportunity for more money, because he needed the initial investment to even grow the company in the first place. Her…

Okay, I accept that I could be entirely wrong. I had forgotten about the role of dividends in determining the value of a company, and that companies definitely do appreciate in real value on average. (I should also have clarified I was thinking only about a closed secondary market, as opposed to the primary market where funds flow into companies.)

What I'd like to understand is this: if the total real value of companies is expanding in the long term, then isn't the stock-trading/investment game about who manages to pick the fastest-growing stocks and capture the most price appreciation? The net gain in value would exist as long as people had invested in the first place, but its distribution is zero-sum in that the net gain in value is captured by someone or other. I guess this is what I was thinking of when I talked in earlier posts about "closing out" all trades - if all trades are closed out at one point in time, then all value in the market is captured by one player or another, and the result is zero-sum.

If the total gains in real company value are influenced by the trading game in the secondary market (e.g. total gains depend on the volume of trading in the secondary market, perhaps through new stock issues), then the question does seem a little more complicated.

Glad to have had this discussion. I guess I need to read up on economics more, although googling didn't turn up a lot of actual literature on stock markets and value-creation right away.

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