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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

#2

Post by klochner »

I like that this innovation is market-driven and introduced as a competing alternative, rather than imposed on existing markets in the form of regulation.

It will be interesting to see if this market provides better pricing for non-HFT participants.

The HFT outfits claim they net out to better pricing for all ("liquidity benefits"), but that's somewhat hard to swallow given that they're acting as giant money sinks on the market system.

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

#5

Post by klochner »

sundae79 wrote: post #4

Actually since it is aimed at institutional investors such as mutual funds, hedge funds, pensions and endowments this will force you to buy mutual funds instead of being an individuall long term investor.

Research points pretty heavily to you being better off buying a basket of index funds rather than playing stock picker.

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

#6

Post by ewjordan »

klochner wrote: post #2

I like that this innovation is market-driven and introduced as a competing alternative, rather than imposed on existing markets in the form of regulation. It will be interesting to see if this market provides better pricing for non-HFT participants. The HFT outfits claim they net out to better pricing for all ("liquidity benefits"), but that's somewhat hard to swallow given that they're acting as giant money sinks on…

IMO this is a ridiculous solution to the problem - rather than creating a market that's set up in a way so that high frequency traders can't get an edge (for instance, creating a market structured so that money/speed/location/regulatory status doesn't actually give you any advantage in trading), they're just banning anyone that doesn't fit their definition of "value trader" from the market.

It will be interesting to see if this market provides better pricing for non-HFT participants.

Given that the only difference between this and a normal market is that a bunch of people offering to buy and/or sell at prices more favorable than the current inside bid/ask are banned from the market, I'm going to go out on a limb and say that no, it won't help pricing very much.

Or, rather, what it will do is move profits that would have gone to the HFT firms and shift them to people placing normal, non-speculative/exploitative/high-frequency limit orders.

Which means that really, there will be an arms race to figure out how to place orders that are as exploitative as possible without tripping the banhammer. The people that push the closest that limit will make the most money, but spreads will still likely be quite a bit higher than in an unfettered market if the rules have any teeth at all - long term value traders are not good at keeping spreads thin, I'd guess that in the current markets their effects on spreads are not even measurable at all, they are so insignificant...

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

#7

Post by klochner »

ewjordan wrote: post #6
klochner wrote: post #2

I like that this innovation is market-driven and introduced as a competing alternative, rather than imposed on existing markets in the form of regulation. It will be interesting to see if this market provides better pricing for non-HFT participants. The HFT outfits claim they net out to better pricing for all ("liquidity benefits"), but that's somewhat hard to swallow given that they're acting as giant money sinks on…

IMO this is a ridiculous solution to the problem - rather than creating a market that's set up in a way so that high frequency traders can't get an edge (for instance, creating a market structured so that money/speed/location/regulatory status doesn't actually give you any advantage in trading), they're just banning anyone that doesn't fit their definition of "value trader" from the market. It will be interesting to…

I honestly didn't read it closely, but apparently you didn't either. Your assertion:

   Given that the only difference between this and a normal 
   market is that a bunch of people offering to buy and/or
   sell at prices more favorable than the current inside
   bid/ask are banned from the market, I'm going to go out 
   on a limb and say that no, it won't help pricing very
   much.
compare that with:

   Since trading on Light Pool will be more expensive and 
   slower for those firms, they’re not likely to use the 
   ECN, reducing the negative selection investors 
   experience, Galinov said.

   Contributors, which will include long-term investors,
   will receive a “significant” rebate when they trade 
   against orders resting in Light Pool, while neutral
   firms, or those whose behavior falls between the other 
   groups, may or may not get one, Galinov said.
So they are trying to get incentives right, rather than outright banning HFTs. Just slowing down the market may be sufficient, try reading this:

   http://ai.eecs.umich.edu/people/wellman/?p=40
(disclaimer: it's from my Ph.D. advisor, so I'm slightly biased)

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

#8

Post by sundae79 »

klochner wrote: post #5
sundae79 wrote: post #4

Actually since it is aimed at institutional investors such as mutual funds, hedge funds, pensions and endowments this will force you to buy mutual funds instead of being an individuall long term investor.

Research points pretty heavily to you being better off buying a basket of index funds rather than playing stock picker.

That is a totally different discussion. The title of this article is misleading since the exchange that they are creating for supposedly, value investing, doesn't really allows any value investor now, does it? Other than of course institutions.

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

#9

Post by tptacek »

klochner wrote: post #2

I like that this innovation is market-driven and introduced as a competing alternative, rather than imposed on existing markets in the form of regulation. It will be interesting to see if this market provides better pricing for non-HFT participants. The HFT outfits claim they net out to better pricing for all ("liquidity benefits"), but that's somewhat hard to swallow given that they're acting as giant money sinks on…

I don't understand that last sentence at all.

HFTs demonstrably are liquidity providers. That's a technical term with a real meaning: liquidity is the ability to trade when you want to trade in the quantity you want to trade it, and it most certainly is not a natural property of the market; in order to buy an instrument, someone has to be willing to sell it.

Meanwhile, what is a "giant money sink", and how is that what HFTs are? I see how HFTs cut out the middlemen who used to profit from volatility, but the low-tech traders they replaced were not themselves value investors.

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