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Finally! This has stolen more money from pensions and retirement savings than all the illegal scams put together!

"High-speed trading firms use powerful computer systems for rapid-fire trades, in which they often hold stocks for only fractions of seconds...."

It's nothing more than quick pump-and-dump in anticipation of completion of block trades from institutional investors. Shame!
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Aaron Wood's profile photoEd Bradford's profile photoJames Salsman's profile photoRobin Green's profile photo
18 comments
 
Every day, index funds rebalance.
Most pension plans have major "index fund" holdings.

I have seen a 'transaction tax' proposed by progressives. I cannot
see how that would help. It certainly would lower the returns on pension plans who invest in index funds. Do you agree?
 
+Ed Bradford I'm pretty sure pricing HFT scammers out of the markets would save funds more on balance.
 
+James Salsman I am unsure about the effects of HFT on the market, largely because the algorithms and their returns are obfuscated by the people who offer them.

However, considering that hedge fund returns are lower than those of index funds, I suspect that algo-heavy HFT is largely a scam perpetrated by its practitioners against accredited investors, not a scam perpetrated by accredited investors against the market.
 
HFTs manipulate the system (if not necessarily the market) by, among other things, making and withdrawing bids that they don't intend to execute. A tax on entering a bid/ask would be useful.

A transaction tax is also a good idea. It would raise significant funds and wouldn't reduce liquidity for most market participants. Only the HFTs would suffer.

HFTs provide a liquidity service, which used to be provided by market makers. The bid/ask spreads are lower now than they used to be. That's good. However, they are not obligated to be market makers. They can withdraw at any time, as some did during the Flash Crash. For the privilege of their preferred access to the market, they should be required always to post bid and asked prices within some range.
 
+Russ Abbott I'm pretty sure the canceled-quote spam is intended to bait other HFT algorithms trading on the same security into selling.
 
HFT is not about 'algorithms'.
"algorithms" are human invented theories about trading. Humans have been
doing "algorithms" for 142 years (Jay Gould was the Einstein of trading!)

It is about trading as soon as you see a 'buy'. A program can see a 'buy' very fast.
Humans, not so fast. High Speed Trading (HST) improves liquidity.

I don't know if it is good or bad; I am uncertain;
no one else does either, because I have seen nothing to convince me one way or
the other.

Computers help automate things that very probably should be automated.

Ed
 
Except that HFT software have "algorithms" implemented within them that are meant to cause market manipulations, not just the automation of buying/selling (for humans making strategic or tactical decisions). The developers often aren't sure exactly what the outcome will be (since they can't control the other actors). So it devolves into high-stakes Core Wars (http://en.wikipedia.org/wiki/Core_War), and the rest of the investment market has to deal with the reconstruction costs.

http://www.theatlantic.com/technology/archive/2010/08/market-data-firm-spots-the-tracks-of-bizarre-robot-traders/60829/

The software is certainly trying to do something, just no one outside of the quants knows what (and they're not talking, aside from saying that they're never sure exactly what will happen).

This is very different from making purchases by using options to catch the values as they move about during the day (for long-term holding), instead, they're (apparently) trying to utilize the noise of intra-day (or intra-second) trading to make infinitesimal amounts on each trade, which can be aggregated together for actual significant returns. As such, some of these can end up in positive feedback loops off of each other, whipsawing a stock around. I've seen some people liken it to a major market crash and recovery in less than a second.

A tax on HFTing would price them out of the HF market, and move the software back to trade automation. Or, it would just drive up the size of the market disturbances that they are trying to create and benefit from (to keep them profitable).
 
HFT's are one of the causes for the May 2010 mini flash crash, according to: http://fp7.portals.mbs.ac.uk/Portals/59/docs/MC%20deliverables/WP27%20A%20Golub%20paper%202_ReportMiniFlashCrash.pdf

+Ed Bradford Because of transaction, aka Tobin tax. You can disrupt the business model of most HFT's if they have to pay a tax of 0,2%, as their low margin deal don't yield enough money.

Another highlight from slashdot: http://developers.slashdot.org/story/11/06/01/0158240/taking-a-look-at-high-end-programmer-salaries Lengthy thread about salaries, but some comments give insight on how the companies are working. eg. They need to change their code multiple times a day, to adopt the strategy changes the competitors made. Functional programming allows them to run their code with only minimal testing, at high speed.

What could possibly go wrong, if highly leveraged investment meets buggy code in nearly uncontrolled, but fast executing market.
 
+Robin Green - because there's nothing illegal about this. And stolen really refers to "reduced the value of".
 
How many HFT programs are there?
If one of them has a bug (a really good bug) wouldn't that more likely bankrupt the operator of that program
leaving the other HFT players with one less competitor?

Pension funds rebalance daily. Wouldn't a "Tobin" tax penalize pension funds many of whom
Depend on index funds?

I still see no logic as to why HFT's are bad. To me, they seem to automate what a human would do anyway, but slower.
 
A better analogy might be the effects of a sports car weaving through heavy truck traffic.

It's not that they're just doing normal things faster, but that they cause disruptions and try to amplify the volatility of stock, causing the slower actors (like pension funds) to have their trades using the results of the mess.
 
+Ed Bradford "Pension funds rebalance daily." From my understanding, you have to pay Tobin tax only if buy securities. If "rebalance daily" means sell everything once a day, then yes, but I doubt that this is the case.

"wouldn't that more likely bankrupt the operator", well yes for sure, but they leverage their investment like LTCM did in the 90's.

"To me, they seem to automate what a human would do anyway", yes but at a much lower pace. Automated trading was one of the reasons that led to the crash in 1987, do we really have to repeat history.

I see no gain in HFT. They don't add long term liquidity to the market, as they hold their positions only for seconds, maybe minutes. They don't create value (or money) as most of the deals are just "man in the middle" deals, without HFT's, other participants would make less/more. But they add a very substantial risk, to all of us. It will and up in as "privatise win, socialise loos"
 
"rebalance daily" is properly termed "mark to market", where they update the fund's value at the end of the day, based on the closing prices of their holdings. All investment banks have to do this as well (to update their valuations).
 
"rebalance" means a fund has to sell losers and buy winners to keep the value of the fund equivalent to the targeted fund. E.g. if you have a DJ index fund, then the fund must keep its relative value equal to the DJ Index. That requires selling and buying on a daily basis. A Tobin tax would increase costs and lower returns on such funds. It would also lower returns for individuals that rebalance their 401K's daily or weekly. I'm no
fan of a Tobin Tax.
 
+Ed Bradford again, I'd have to see whether it was more or less than losses due to high frequency trading. Also, I wonder whether index funds can rebalance with derivatives.
 
+James Salsman
Ooops! Does a Tobin tax not apply to derivatives?

How does one count "loses" (or gains?) "due to high frequency trading"? Can I do that
for my 401K loses (or gains)?
 
+Ed Bradford Tobin tax is not target to HFT, but to all kind of low margin trades, independent of if the trade is a gain or loss.
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