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Algorithmic Trading Rapidly Replacing Need For Humans

Soulskill posted more than 2 years ago | from the digitizing-greed-and-fear dept.

Businesses 331

DMandPenfold writes "Algorithmic trading, also known as high frequency trading (HFT), is rapidly replacing human decision making, according to a UK government panel which warned that the right regulations need to be introduced to protect stock markets. Around one third of share trading in the UK is conducted by computers fulfilling commands based on complex algorithms, said the Foresight panel in a working paper published yesterday. Nevertheless, this proportion is significantly lower than in the U.S., where three-quarters of equity dealing is computer generated. The Foresight panel, led by Dame Clara Furse, the former chief executive of the London Stock Exchange, argued that there are both benefits and severe risks to algorithmic trading. There was 'no direct evidence' that the computer trading in itself increased volatility, it said, but in specific circumstances it was possible for a series of events with 'undesired interactions and outcomes' to occur and cause massive damage."

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331 comments

Not replacing, just adding on top (1)

North Korea (2457866) | more than 2 years ago | (#37353440)

It's not replacing humans, it just improves profit making for those who want to trade. It's only one part of stock exchanges. That's fine too - if you can come up with an advanced algorithm that nets you profit, sure use it. Everyone on slashdot would.

Re:Not replacing, just adding on top (4, Insightful)

Hatta (162192) | more than 2 years ago | (#37353476)

It's not replacing humans, it just improves profit making for those who want to trade

By siphoning value away from those who want to do something productive.

Re:Not replacing, just adding on top (2)

h4rr4r (612664) | more than 2 years ago | (#37353566)

What is this something productive that the stock market does?
Other than issuing new stock, when is it productive for the companies invested in?

Seems not much different than trading cards, now that most companies don't give dividends.

Re:Not replacing, just adding on top (1)

Anrego (830717) | more than 2 years ago | (#37353674)

The original idea made sense!

Here is how it was supposed to go:

  I have a really great idea and here is how I think it will become profitable... I need a metric ass-tonne of money to get going though!
  this looks like a solid idea, here is some money to get going in exchange for a small chunk of your company... if it takes off.. this chunk will be worth more than I am giving you now

But I agree, it has become so abstract from this with so much bullshit that just skims off the top that we should just start over, with regulations like "you are limited to 50 trades over the course of your lifetime".

Re:Not replacing, just adding on top (1)

LordNacho (1909280) | more than 2 years ago | (#37353744)

Dude, that doesn't explain the original idea.

You do realize that when you buy a share at the NYSE, none of that money goes to the company, right? That's because what we call the stock market is the secondary market. Now, why do we need a secondary market? Because it makes primary investors, who DO give money to the company a little less uneasy about risking their money. If there's someone else they can dump it on, they'll be more willing to put up the money.

Re:Not replacing, just adding on top (2)

h4rr4r (612664) | more than 2 years ago | (#37353844)

It is a rigged second market. With fees no other secondary market has, it has regulations that prevents market participants from being on even playing ground and on top of it no one is really interested in non-institutional investors.

Re:Not replacing, just adding on top (1)

LordNacho (1909280) | more than 2 years ago | (#37354248)

The money necessary to trade in the market is minuscule. What regulations are you talking about? The only people who are on a different level are the market makers, because of their rather central position in the system. And that's both meat-and-bones MMs and the HFT kind. And there's nothing stopping you from becoming one either...

Re:Not replacing, just adding on top (1)

Registered Coward v2 (447531) | more than 2 years ago | (#37354090)

Dude, that doesn't explain the original idea.

You do realize that when you buy a share at the NYSE, none of that money goes to the company, right?

While that is generally true, that is not always the case. First, a company can buy and sell shares it holds; or issue more shares to raise cash.

Re:Not replacing, just adding on top (1)

LordNacho (1909280) | more than 2 years ago | (#37354188)

Good point. But I'd say companies buying/selling their own shares is still more akin to a primary market operation. Much as when a fund does it.

Re:Not replacing, just adding on top (1)

Anonymous Coward | more than 2 years ago | (#37353702)

"What is this something productive that the stock market does?"

It allows people such as you and I to have part ownership in publicly traded companies. Said companies receive money for development and operation of whatever it is they do, and in exchange, I stand to profit (or lose) depending on how they do.

You're welcome to not participate, but every major economy uses a variant of this system, because it's all but impossible to NOT have such a system and retain a modern economy.

There is no guarantee you will not lose money, especially in the short term. But in the long term - about 4 decades for me now - I am far, far better off having invested money in the stock market. You're certainly free not to, though.

Re:Not replacing, just adding on top (1)

Anonymous Coward | more than 2 years ago | (#37354072)

90% (number I'm pulling out of my butt) or so of the HTF is arbitrage. To give you an example look at the 9:30AM EST to 4PM EST high volume trades (BAC, SPY, GLD, MA, APPL, etc) and compare the after-hour and before market of SPY and GLD (Which are NYSE ARCA) to BAC, MA, APPL. What you'll notice is that in the hour immediately after the market closes there will suddenly be a huge volume of limit orders, but no liquidity. When the market starts trading again you'll see the first 30 minutes of trading go in the direction opposite of the limit orders. And this pattern will be seen across nearly every stock in the S&P 500. Right now 80% (see KCJ) of stocks are moving in sync. This means that you get screwed if you invest in an individual stock, because even if that ONE stock performs well, the market is must move in the same direction otherwise you still lose equity value. Which is why people are dumping their money into SPY (S&P 500 ETF) because that IS the market direction.

The SPY ETF has a market cap larger than BAC. What does that yell you?

Re:Not replacing, just adding on top (1)

hweimer (709734) | more than 2 years ago | (#37353716)

What is this something productive that the stock market does?

It allows people like you and me to participate in economic growth.

Re:Not replacing, just adding on top (2)

h4rr4r (612664) | more than 2 years ago | (#37353762)

That was the idea once upon a time. These days I disagree.

Otherwise stock would have voting rights that mattered and pay dividends.

Re:Not replacing, just adding on top (1)

LordNacho (1909280) | more than 2 years ago | (#37353988)

First of all, stocks DO have voting rights. The fact that you can't control Coca Cola with your 100 lot is due to other people owning more shares than you. This is no different from your 1 vote for president not mattering at all. Except of course people with more to lose in Coca Cola have more votes, which is entirely appropriate.

Your comment about dividends is telling. Here's the standard explanation that you'll hear in any course about why it doesn't matter: if a company doesn't pay out a dividend, it keeps the cash. Investors can then adjust their valuation accordingly.

Re:Not replacing, just adding on top (1)

Dunbal (464142) | more than 2 years ago | (#37354198)

First of all, stocks DO have voting rights.

You need to learn the difference between share classes: common vs preferred, voting vs non-voting, etc.

Re:Not replacing, just adding on top (1)

LordNacho (1909280) | more than 2 years ago | (#37354288)

Yeah, I thought I'd keep it simple and not mention A and B shares, that type of shenanigans. But better keep it simple. You have stock, you can vote. And hey, is it voluntary or not to buy a stock? If the stock you are interested in doesn't have the voting rights you want, well, you decide whether you want to buy it.

Re:Not replacing, just adding on top (1)

tenco (773732) | more than 2 years ago | (#37354304)

The fact that you can't control Coca Cola with your 100 lot is due to other people owning more shares than you. This is no different from your 1 vote for president not mattering at all.

Bullshit. Of course this is different. A democratic vote adheres to "1 man, 1 vote".

Re:Not replacing, just adding on top (1)

h4rr4r (612664) | more than 2 years ago | (#37354308)

Learn about different share classes.

Your rather flippant reply about dividends is telling. Here is reality, it does not matter because the value of a company no longer has anything to do with the value of what it produces or does.

Re:Not replacing, just adding on top (1)

0123456 (636235) | more than 2 years ago | (#37353846)

It allows people like you and me to participate in economic growth.

Translation: it takes your retirement money and hands it to sociopaths, solely because of preferential tax treatment.

Re:Not replacing, just adding on top (1)

nedlohs (1335013) | more than 2 years ago | (#37354382)

Issueing new stock would be far more difficult without a functioning market for trading existing stock. So that secondary market is important for the issuing of new stock.

And of course the companies are the objects being traded - the beneficiaries are the owners not the companies.

Re:Not replacing, just adding on top (4, Insightful)

ipoverscsi (523760) | more than 2 years ago | (#37354390)

The purpose of the stock market is to provide price discovery. If you had perfect information at all times you would know the price of a good and the stock market would be pointless. But because perfect information is impossible, the stock market crowd-sources the gathering of information so that the true price can be discovered.

Determining the price of a good is something only a human can do. Price is a value quantified, and determining value requires sifting and filtering of information and the application of significant amounts of gut instinct. Computers cannot set prices since they don't have any concept of value -- they have neither needs not wants.

Computer assisted trading -- trades where people set stops and buy limits -- is okay because the human has done the work to determine the valid price ranges a priori; the computer simply executes the bid on behalf of the user.

High Frequency Trading, however, should be illegal since it does not involve human value judgements at all. It simply allows a computer to front-run actual humans and siphon off people attempting to perform a useful act -- that is, price discovery.

Re:Not replacing, just adding on top (2)

Anrego (830717) | more than 2 years ago | (#37353602)

Agreed.

The way it was supposed to work.. where people would invest in ideas they thought were good in the hopes that they would take off and make a profit... made sense.

It's so abstract from that and there is so much skimming off the top (don't give me "market liquidity" crap...) now that we ideally should just wipe it and start fresh from the basics, with regulations in place to prevent the kind of bullshit that is happening at present.

Problem is the people who could make this kind of thing happen are bringing in so much money from the way things currently are, that they have little motivation to do so.

Re:Not replacing, just adding on top (0)

Anonymous Coward | more than 2 years ago | (#37353650)

just need to kill off the leeches with a new revolution.

Re:Not replacing, just adding on top (2)

TheRaven64 (641858) | more than 2 years ago | (#37353778)

don't give me "market liquidity" crap.

It's not all crap. There is value in liquidity. A company that wants to expand needs to be able to finance this expansion. This typically involves either issuing more shares or getting a loan. The former is preferable to the company (no interest to pay), but needs investors. Having some speculators in the market makes it possible for the company to issue the stock and sell it immediately to speculators, who later sell it on to long-term investors once they've had more time to judge the risks.

The problem is that we now have a lot more speculators and they dominate the system, so the ability of a company to raise capital no longer depends on whether it's a good long-term investment, but on the opinions of the speculators.

Re:Not replacing, just adding on top (0)

Anonymous Coward | more than 2 years ago | (#37353958)

That's all well and good, but HFTs should have to play by the same rules that traditional investors do. As it is, HFTs can respond to trades made by traditional investors and, due to their proximity to the exchange, get their trade in before the traditional trade.

It makes sense that there is a difference between the selling price and the buying price, but it seems nonsensical that well-positioned HFTs should be allowed to pocket that difference. The difference in prices should be divided between the buyer and seller.

It's fine to allow computers to trade automatically, but they should be forced to respond the the market like every other investor does. Granted, they will respond more quickly than a human can, but that response will still take place, at a minimum, nanoseconds after the trade they're responding to.

Re:Not replacing, just adding on top (1)

LordNacho (1909280) | more than 2 years ago | (#37354048)

don't give me "market liquidity" crap.

The problem is that we now have a lot more speculators and they dominate the system, so the ability of a company to raise capital no longer depends on whether it's a good long-term investment, but on the opinions of the speculators.

And what do you think the speculators use to determine prices? That's right, they make a judgement as to the long-term prospects of the company. In fact, they freely give out this information for everyone, for free. If you didn't have a market in a company, (suppose it's a privately owned restaurant) you'd have to do a lot of legwork figuring out what it was worth.

Re:Not replacing, just adding on top (2)

H3lldr0p (40304) | more than 2 years ago | (#37354296)

I think they use a number of financial tools and hold a number of positions on a given stock, none of which look at the long term stability, profitability, or sustainability of the company but instead focus on the day to day noise in order to maximize when to trade which option they currently hold the most money in.

These people look for the gaps. The gaps of knowledge, the gaps of valuation, and the gaps of naivety of those just getting into that sort of trading. They at not looking at the value of the employees, the value of the products, or the value of the actual company.

Just look at the oil markets and how volatile and uncoupled from supply and demand they've become. We're sitting at the lowest demand for gasoline in fifty years but it's still being traded at two to three times what many feel is the actual value of the good. Look at what it has done to demand for the product and for the larger economy. That is what speculation has gotten us.

Re:Not replacing, just adding on top (1)

Dogtanian (588974) | more than 2 years ago | (#37354116)

don't give me "market liquidity" crap.

It's not all crap.There is value in liquidity.

I don't think he was disputing that- I think you misinterpreted what (I assume) he was trying to say.

Namely that he doesn't believe the stock response that such behaviour is always ultimately beneficial because it increases liquidity- or at least that it doesn't increase liquidity sufficiently to offset the skimming and other drawbacks.

Re:Not replacing, just adding on top (1)

phatphoton (2099888) | more than 2 years ago | (#37353868)

Agreed! Thank you!

Re:Not replacing, just adding on top (1)

Dunbal (464142) | more than 2 years ago | (#37354174)

Explain how value is "siphoned away".

Hey Now! (1)

ThatsNotPudding (1045640) | more than 2 years ago | (#37354180)

Those Wall Street millionaires are barely making ends mink!! Meet; I meant meet.

Re:Not replacing, just adding on top (1)

thePuck77 (1311533) | more than 2 years ago | (#37353488)

It's not replacing humans, it just improves profit making for those who want to trade. It's only one part of stock exchanges. That's fine too - if you can come up with an advanced algorithm that nets you profit, sure use it. Everyone on slashdot would.

It's not replacing humans yet. And that's fine. When it does, investors will simply move to a higher level of abstraction and a new level of economic engagement will come into being. Larger, more subtle patterns will become apparent and we will simply have a new game to play.

Re:Not replacing, just adding on top (2)

MightyMartian (840721) | more than 2 years ago | (#37353636)

In other words, the system will become so complex that we will quite literally be unable to ever quite figure out what's going on, until, of course, it all collapses, kills trillions of dollars in value, renders most economies smoking ruins, and then everyone will finally ask "Why the fuck did ever let that happen?"

Re:Not replacing, just adding on top (1)

jamiesan (715069) | more than 2 years ago | (#37353714)

This will be why Skynet never runs out of money to build new stuff!

Re:Not replacing, just adding on top (3, Insightful)

Tsingi (870990) | more than 2 years ago | (#37353726)

In other words, the system will become so complex that we will quite literally be unable to ever quite figure out what's going on, until, of course, it all collapses, kills trillions of dollars in value, renders most economies smoking ruins, and then everyone will finally ask "Why the fuck did ever let that happen?"

Umm, I think we've already been there.

Re:Not replacing, just adding on top (1)

LordNacho (1909280) | more than 2 years ago | (#37353788)

Even without a single computer based trade, the system as so complex that "we will quite literally be unable to ever quite figure out what's going on, until, of course, it all collapses..."

Computers are a new angle, but let's not pretend the market ever made sense before that.

Re:Not replacing, just adding on top (1)

thePuck77 (1311533) | more than 2 years ago | (#37353796)

That happened a long time ago. This at least concedes that human minds are incapable of (or unwilling to) deal with that level of complexity, so we are going to use machines to deal with it. It's honest, and it might even work for a while, further avoiding the inevitable consequences of our economic system. That's all we can really hope for. Nothing can save an economy that doesn't really make anything, yet uses more resources than anyone else.

Re:Not replacing, just adding on top (1)

LordNacho (1909280) | more than 2 years ago | (#37354066)

Doesn't make anything? There's load of container vessels sailing around the oceans delivering "things".

Re:Not replacing, just adding on top (1)

interval1066 (668936) | more than 2 years ago | (#37354320)

In other words, the system will become so complex..., kill[ing] trillions of dollars in value, renders most economies smoking ruins, and then everyone will finally ask "Why the fuck did ever let that happen?"

Kind of like what happened in 1819, 1837, 1857, 1873, 1893, 1929, 1973, 1989, 2008...

The take away here is I don't know that adding complexity, as you call it, will cause more crashes than the market's already experienced. Sure, they're painful, but they're inherent in a free market economy, and nothing new. Automating trading isn't going to change anything. I guess you could always outlaw private trading like China did. Oh wait... they kind of do now, don't they?

Re:Not replacing, just adding on top (1)

Fnord666 (889225) | more than 2 years ago | (#37353900)

It's not replacing humans yet. And that's fine. When it does, investors will simply move to a higher level of abstraction and a new level of economic engagement will come into being. Larger, more subtle patterns will become apparent and we will simply have a new game to play.

In the end though it will be turtles all the way down.

Re:Not replacing, just adding on top (0)

Anonymous Coward | more than 2 years ago | (#37353852)

Most people here just don't understand... these algorithms were mainly used by big investment banks to do naked shorts to take down companies, countries, and markets.
That's why they should be banned, because NAKED SHORTING IS ILLEGAL.

Re:Not replacing, just adding on top (1)

somersault (912633) | more than 2 years ago | (#37354342)

How can you be naked if you're wearing shorts? No wonder it's illegal!

clever humans can introduce "black swans" (1)

peter303 (12292) | more than 2 years ago | (#37353502)

And through off the computers.

Re:clever humans can introduce "black swans" (2)

Nursie (632944) | more than 2 years ago | (#37353590)

Only if they work for the right people. Otherwise they'll be arrested and thrown in jail.

Re:clever humans can introduce "black swans" (1)

Evangelion (2145) | more than 2 years ago | (#37353666)

Then the algorithm corrects for that after seeing it once.

You, coming up with a "plan" 10 seconds after reading an article -- you can't outthink people who are employed to come up with ideas for improving how the computer thinks.

Re:clever humans can introduce "black swans" (1)

RebelWithoutAClue (578771) | more than 2 years ago | (#37353858)

Nope. Dedicated amateurs often do better than the professionals. http://www.engadget.com/2011/01/20/when-it-comes-to-forecasting-apples-earnings-amateurs-are-bett/ [engadget.com]

The professionals also tend to have blind spots ...

Re:clever humans can introduce "black swans" (1)

xclr8r (658786) | more than 2 years ago | (#37354050)

Some of the comments in that link claim that 4 of the 'amateurs are on the finance board'. I don't have the time for vetting the comments though.

Absolutely (3, Interesting)

Anonymous Coward | more than 2 years ago | (#37353530)

As someone who worked at Goldman Sachs, I can completely attest to this; a lot of the software was automated, but what the trading group was always asking for was basically an autopilot system; they wanted to sit back and just let the money roll in. One of them, I remember it distinctly, said that he'd love it if he didn't have to watch all the various windows all the time because he "had better things to do".

This was the same group of guys who, one of them told me "if I could kill you, not get caught, and make money because if it...I wouldn't think twice".

Fun times...

so SkyNet is really a Wall Street computer? (2)

peter303 (12292) | more than 2 years ago | (#37353548)

The computer that "takes over the world" wont come from a mad scientist's workshop or the military-industrial complex. Instead it will emerge out of Wall Street. There are few stronger motives for Artificial Intelligence than to make lots of money.

Re:so SkyNet is really a Wall Street computer? (1)

MightyMartian (840721) | more than 2 years ago | (#37353654)

Intelligence, artificial or otherwise, would be welcome on Wall Street right now.

Re:so SkyNet is really a Wall Street computer? (1)

Evangelion (2145) | more than 2 years ago | (#37353690)

Thanks for not understanding how evolution, or the mind for that matter, works.

We have facilities for communication and self-identity largely as a result of being hunters -- being able to "run a model" of our prey in our minds was massively useful. This structure then got applied to the self, and so the ego was born. (This is one of the currently en vogue evolutionary explanations for the rise of consciousness -- obviously not a subject you can create causal experiments to test easily).

What evolutionary pressures are there for creating self-awareness in algorithmic trading applications (given that it would necessarily be less efficient, and likely introduce errors)?

Re:so SkyNet is really a Wall Street computer? (1)

gatkinso (15975) | more than 2 years ago | (#37354460)

Read "Wealth" by Robert Reed.

This is bullshit. (5, Insightful)

brxndxn (461473) | more than 2 years ago | (#37353616)

HFT does not help the market in any way. It does not promote the investing of capital. Going into and out of a company in less than a second is ridiculous. Steps need to be taken to stop HFT in its tracks before the whole market is ruined.

This will fix HFT:

1. random delay in all trades.. stick a 100ms to 1000ms delay before all trades are posted on the market
2. tax all trades by a miniscule percentage.. give straight to government debt
3. enact a rule that all trades stand.. erroneous trades made by a computer algorithm will never get rolled back

Re:This is bullshit. (2)

Ruke (857276) | more than 2 years ago | (#37353672)

You assert that HFT does not help the market in any way. I'd be inclined to agree, but that's really just my gut feeling. Can anyone provide any kind of source, one way or the other, saying that HFT is necessary, or good, or terribly evil? I'd like to hear what actual economists think of it, rather than just laymen.

Re:This is bullshit. (5, Interesting)

LordNacho (1909280) | more than 2 years ago | (#37353856)

I Googled it. Here's a report about what some researchers think:

http://www.tradersnarrative.com/what-if-hft-is-actually-good-for-the-market-4723.html [tradersnarrative.com]

"That public perception may need to be adjusted according to this recent research by finance PhD candidate, Jonathan Brogaard (Kellogg). The paper looks at the effect of HFT on equity markets and through analysing the strategies used by these firms it considers their profitability, impact on market liquidity and volatility.

There is evidence that high frequency trading contributes to price discovery and liquidity. There is also evidence that it has a minimal impact on volatility and may even reduce it. There is also no evidence that they engage in front-running. HFT demand for liquidity (42.7%) is slightly higher than their supply of liquidity (41.1%) and they provide the inside quote about 65% of the time."

Re:This is bullshit. (5, Interesting)

dannys42 (61725) | more than 2 years ago | (#37354366)

The problem with studies like that, and much of the analysis of the stock market, is that it's all done on the numbers. The researchers may be absolutely correct in their study. However, what the current state of the stock market does do is encourage the "wrong" state of mind for many businesses. It's my belief that going public ruins more companies than it helps for exactly this reason (this would be a human study not a numbers study). People start making decisions based on what they thing the investors want that quarter. And to me, that's the surest way to kill a business, as you've now taken away from your focus on your customers and your employees. So while HFT may increase liquidity and all that good stuff, it's doing so at the cost of the long term health of the company. (Not all businesses fall into this of course, but it appears to be more common than not).

I may not be a serious day trader, but as an (albiet modest) investor, I want a company that thinks long term. And it's my understanding the stock market was originally created for investment purposes. What sort of "investment" is it to put money into company for a second or even a day or a week? I actually think the time window for making trades should be more like one a month or even a quarter or maybe twice a year. With a longer period between trades, I understand people may feel uneasy about the commitment, but I think that's exactly what it should mean to "invest." However, if it's a big enough deal to people, then perhaps you could also have a (shorter) window for backing out (with perhaps a small penalty).

Re:This is bullshit. (0)

Anonymous Coward | more than 2 years ago | (#37353898)

HFT can't be "necessary" the stock market worked just fine for a very long time before computers existed. Anyone who tells you otherwise is lying or stupid.

The argument that it is "good" is basically this:
You can only make a trade if someone else wants to take the other end of the trade (you can't buy unless someone wants to sell). The ease with which you can sell or buy a stock after having made the choice to do so is called "liquidity" and a market with thousands of trade requests every millisecond will be more liquid than one that has only a couple of trades every second.

Now, this fails to address the question of "how much liquidity is enough?" and generally speaking the people claiming that the market "needs" that extra liquidity are making lots of money off HFTs.

Re:This is bullshit. (0)

Anonymous Coward | more than 2 years ago | (#37353930)

plain and simple, HFT is skimming. Or in ticketmaster terms, it's scalping. Wall street traders generally are immoral bunch, so any argument they make is already suspect.

Re:This is bullshit. (1)

MimeticLie (1866406) | more than 2 years ago | (#37354010)

Paul Krugman agrees. He argues that the benefits of HFT are dubious, but the costs essentially amount to a tax on anyone who doesn't have access to a HFT system. [nytimes.com] He also compares HFT to someone who speculates on the market based on confidential information, which has been well established as a Bad Thing for a long time.

Re:This is bullshit. (2)

j. andrew rogers (774820) | more than 2 years ago | (#37354088)

Can anyone provide any kind of source, one way or the other, saying that HFT is necessary, or good, or terribly evil? I'd like to hear what actual economists think of it, rather than just laymen.

The empirical impact of HFTs on market behavior and non-HFT traders has been studied, the following paper for example:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1641387 [ssrn.com]

From the abstract: "These findings suggest that HFTs' activities are not detrimental to non-HFTs and that HFT tends to improve market quality."

This is in line with the findings of most serious studies. The intuitions of most laymen fail them because they do not understand market dynamics.

Re:This is bullshit. (1)

bluefoxlucid (723572) | more than 2 years ago | (#37354442)

This is in line with the findings of most serious studies. The intuitions of most laymen fail them because they do not understand market dynamics.

The layman explanation for the market is "One person gets richer off another idiot getting poorer." I get rich by selling my overvalued shit to some tard and then buying some undervalued shit from some other tard. Those guys lose money buying high and selling low. Long positions work one way, buy low from idiot who is undervaluing and sell high to idiot who is overvaluing; short positions work by selling high to idiot who is overvaluing and then buying low back from him after he's lost money. As the market cycles, long positions eventually tick over with someone buying high near peak and losing their ass; short positions are taken by the smart investor up at the top, and directly operate along the crash cycle.

Thus it stands to reason that if HFT makes one entity richer, it must make another entity poorer.

Re:This is bullshit. (1)

Mindcontrolled (1388007) | more than 2 years ago | (#37354094)

The prime argument against HFT is that indeed the market worked fine before it. Actually, probably better. Not like the stock markets in the 60 or 70s lacked liquidity, which seems to be the prime argument of HFT proponents. HFT does one thing and one thing only - it allows a privileged group to skim money of each and every trade. Pure parasitism.

Re:This is bullshit. (1)

LordNacho (1909280) | more than 2 years ago | (#37354356)

Do you want to explain how they skim this money? I have yet to see anyone come up with an example that had anything to do with market reality.

Re:This is bullshit. (1)

Znork (31774) | more than 2 years ago | (#37354122)

The response you'll get from actual economists will depend on who is paying them.

HFT is in its essence neither good nor bad, but it has various issues. As it currently works it does allow manipulation of values by allowing fake offers that are withdrawn as soon as they're made. They can often see orders before most humans and 'cheat', but that in itself is not exactly 'evil'.

They provide some liquidity, but that liquidity will probably be gone faster than anyone can react in a situation where it would actually be needed and desired. Simply because they need to protect themselves from running amok.

In the end they'll wipe out a few professions, redistribute some wealth and make the stock market even more of a losers game than it is already, but compared to the pseudo-science of central banks the damage they'll do is minimal.

Re:This is bullshit. (1)

Neppy (673459) | more than 2 years ago | (#37353722)

3. enact a rule that all trades stand.. erroneous trades made by a computer algorithm will never get rolled back

THIS. It is total bullshit that if your computer fucks up massively you get a rollback. Keep your winnings if you win, get your money back if you lose. What a deal for the big firms.

Re:This is bullshit. (1)

0123456 (636235) | more than 2 years ago | (#37353776)

Keep your winnings if you win, get your money back if you lose. What a deal for the big firms.

Don't forget 'get bailed out by the taxpayer when you really screw up'.

Re:This is bullshit. (1)

skaffen42 (579313) | more than 2 years ago | (#37354100)

3. enact a rule that all trades stand.. erroneous trades made by a computer algorithm will never get rolled back

THIS. It is total bullshit that if your computer fucks up massively you get a rollback. Keep your winnings if you win, get your money back if you lose. What a deal for the big firms.

I think the HFT people would be the first to support this rule.

Remember the "flash crash"? From what I understand the reason the market went into freefall was that a lot of the HFT folk pulled out of the market when they though there was a risk their trades would be reversed. So they turned of their computers and the liquidity they added to the market disappeared. Result... market goes into freefall.

Re:This is bullshit. (0)

Anonymous Coward | more than 2 years ago | (#37353724)

RTF or do research, most HFT is market making, they try to be first in queue to sell you the share at the lowest price or buy at the highest. They reduce spread between bid/ask.

Re:This is bullshit. (1)

dcollins (135727) | more than 2 years ago | (#37353828)

I think I agree with this. (I'd like to see a counter-argument if anyone has one.) The one nuance is that I doubt the last one would make much difference... whereas the others are constantly active (and clearly need to be dealt with by traders continuously), the latter is more of a "catastrophic execution" penalty that might be ignored for years, and when it does come into play, maybe the business just declares bankruptcy or gets a government bailout.

Re:This is bullshit. (1)

LordNacho (1909280) | more than 2 years ago | (#37354130)

If they get a bailout, that's a problem with politicians, not the market!

Re:This is bullshit. (1)

LordNacho (1909280) | more than 2 years ago | (#37353892)

Someone wants to buy and sell the same stock in the same second. What's wrong with that? He's got his investment strategy, you have yours.

Re:This is bullshit. (1)

Mindcontrolled (1388007) | more than 2 years ago | (#37354154)

What's wrong is that he can do it and I can not. A small subgroup of parasites got enabled to leech on the system. Asymmetry, you see? The thing that should not exist in a free market...

Re:This is bullshit. (1)

LordNacho (1909280) | more than 2 years ago | (#37354210)

What's not free about it? You're not prevented from doing it...

Re:This is bullshit. (1)

H3lldr0p (40304) | more than 2 years ago | (#37354550)

If, by law, you mean someone is not prevented from doing it, then you are correct.

However, to become a HFT there are a number of substantial barriers to entry you have to overcome. Not the least of which is that many of the privately held markets require you to buy a seat on them. The price of a seat on the NYSE is currently four million dollars. Not exactly change you can find in the sofa cushions. And then there is the capital outlay for the computer systems, the rental for where to house them, the fiber to the market and whatever it will cost to hook up to their computers, and so on and so forth.

In short, it is for elites only. It is for those who can afford it. It is, in fact, something that you are prevented from doing if you are so inclined to do so.

Re:This is bullshit. (0)

Anonymous Coward | more than 2 years ago | (#37354492)

You don't even need to tax all trades. Just put a 1% tax on the sale price of any stock which is held for less than one minute.

Bonus (1)

0123456 (636235) | more than 2 years ago | (#37353630)

So what happens when the algorithms start demanding a billion dollar bonus before they'll turn up to work?

Re:Bonus (1)

PickyH3D (680158) | more than 2 years ago | (#37354190)

Then you unplug the self-aware machine.

Additional regulations (5, Interesting)

Halo1 (136547) | more than 2 years ago | (#37353634)

Algorithmic trading, also known as high frequency trading (HFT), is rapidly replacing human decision making, according to a UK government panel which warned that the right regulations need to be introduced to protect stock markets

Like making it illegal [slashdot.org] for humans to beat the algorithms?

Re:Additional regulations (0)

Anonymous Coward | more than 2 years ago | (#37353838)

HFT is easy to 'end'

Minimum time to own (days).

Max number of trades per day.

Now the question is do they really want to end it or not. The answer is no btw. There is 'money to be made'.

That money to be made is creating demand that does not exist. You can not cheat the market long term. It *WILL* crash. But short term you can rake it in...

Algorithmic Trading is not trading (1)

lecheiron (2441744) | more than 2 years ago | (#37353638)

its stealing money from peoples wallets. with algorithmic trading, it is no longer an orderly market.

Re:Algorithmic Trading is not trading (2)

Erbo (384) | more than 2 years ago | (#37354082)

It is absolutely this. I would go so far as to say that no individual investor has a chance in the markets when going up against these HFT algorithms run by the big banks and trading firms. No matter how good your analysis or how closely you watch the market like a hawk, you're going to be screwed, blued, and tattooed.

And this comes at the same time as The Fed and Chairsatan The Ben Bernank have pretty much destroyed all "safe" investments through manipulation of interest rates, forcing people to turn to the stock market if they want any hope of any kind of significant return on their money...and where they can be fleeced by the HFT algorithms and the bankster fraudsters. Not to mention destroying the purchasing power of those dollars via "quantitative easing" (read: money printing) games.

Probably a good time to invest in precious metals. No, not gold, silver, and platinum. I'm talking steel, lead, and brass...in appropriate forms, of course.

Re:Algorithmic Trading is not trading (1)

Dunbal (464142) | more than 2 years ago | (#37354260)

No matter how good your analysis or how closely you watch the market like a hawk, you're going to be screwed, blued, and tattooed.

I beg to differ. Trading is all about the banks taking out the stops. Once you learn where the soft stops are, you can make money, since you will be trading in the same direction as the big brokers and banks - so long as you stay small enough to not be seen as a target yourself.

Re:Algorithmic Trading is not trading (0)

Anonymous Coward | more than 2 years ago | (#37354478)

Ummm ... HFT trading is about holding trades for very limited periods of time. If your expected holding period is months or years, HFT has very little impact on you.

Re:Algorithmic Trading is not trading (1)

cheekyjohnson (1873388) | more than 2 years ago | (#37354454)

Humans can't beat them easily. Therefore, it's theft of existing property.

Awesome... (4, Insightful)

RobinEggs (1453925) | more than 2 years ago | (#37353748)

I've never been convinced that HFT is anything but a scam to make institutional investors more money without doing more research or making more socially responsible investment decisions.

The company worth truly investing in, in the sense that you hope it survives and hope it continues to grow as opposed to only making you lots of money, is the one that will treat the environment, their employees, their supply chain, and their customers with respect while paying investors and owners a respectable return.

HFT algorithms don't give a fuck about any of that, exactly like the stereotypical Wall Street broker doesn't care about any of that; in fact HFT algorithms were written when brokers realized they could make more money in corrupting and managing young mathematicians than in doing their own jobs. HFT just further emphasizes empty, short-term speculation without regard to the product sold, the behavior of the company, or the future potential of the company. It enables the irresponsible greed of people who just want to make a dollar in the next day to become the irresponsible greed of people who just want to make a dollar in the next 0.0000000001 seconds.

Re:Awesome... (3, Insightful)

FoolishOwl (1698506) | more than 2 years ago | (#37354166)

If investment decisions are better made by computer program than by human investors, what justification is left for private ownership of capital? And what's the argument against planned economics?

Can we have another look at the idea of democratically deciding upon our social priorities?

I can write a program that... (0)

Anonymous Coward | more than 2 years ago | (#37353760)

uses an algorithm to trade: I take the numerological sum of the letters in the stock, add the numerological value of the date and time, and check in a table (generated at random) to see if they are "compatible".

It would be exactly as valid as the "algorithms" used by traders. It has no basis in fact, and indeed is directly contradicted by the very theory they base their lives on: Hayek's freemarketism. In the end, almost all of these "algorithms" have been shown to be as valid as chance.

Working in this sector... (0)

Anonymous Coward | more than 2 years ago | (#37353806)

...and the fact that actually traders, who notoriously consider themselves above the computers/IT, will be replaced by algorithms makes the current (and future) situation very very ironic.
I would say LOL to them but unfortunately now they wouldn't understand. In possibly 4/5 years they will understand! :-)

Restatement of an old maxim (1)

russotto (537200) | more than 2 years ago | (#37353830)

There was 'no direct evidence' that the computer trading in itself increased volatility, it said, but in specific circumstances it was possible for a series of events with 'undesired interactions and outcomes' to occur and cause massive damage."

Or, in other words, "To err is human; to really foul things up requires a computer"

Yawn (0)

Anonymous Coward | more than 2 years ago | (#37353834)

They can trade all they want, I don't really care.
I'll buy when it's undervalued according to me, and sell when it's overvalued.

If they screw up and sell it for much less or offer to pay much more than it's worth I win not them.

Re:Yawn (1)

h4rr4r (612664) | more than 2 years ago | (#37353976)

Nope, then they declare the computer made a mistake and they roll back the trades. If they really fuckup they get the government to bail them out with your tax money.

Time for rethink (1)

Princeofcups (150855) | more than 2 years ago | (#37354064)

The real question is: what was the original purpose of the stock market? What problem is it trying to solve? I guarantee that letting people make money by micro-trading of stocks based on nothing but trends and volatility is not it. It's time to rethink the whole system, but wait, there's a trillion dollars and the stability of national economies at stake. We're stuck with it, short of some kind of (permanent) revolution.

Time to go read more Trotsky.

Stock markets are just legalized gambling nowadays (1)

msobkow (48369) | more than 2 years ago | (#37354118)

The stock markets are no longer about investing in companies you believe in or who have a solid track record. It's just computerized gambling.

Re:Stock markets are just legalized gambling nowad (1)

LordNacho (1909280) | more than 2 years ago | (#37354408)

And gambling is wrong?

Idiots (0)

Anonymous Coward | more than 2 years ago | (#37354268)

Algo trading is not HFT. Whoever wrote the article is an idiot. Algo trading is any kind of automated trading. HFT is high frequency trading, a very specific form of algo trading, which is probably not that profitable as people make it out to be. http://blogs.wsj.com/deals/2010/09/24/high-frequency-trading-not-as-profitable-as-you-think/

Humans wrote the algorithms... (1)

RL78 (1968236) | more than 2 years ago | (#37354292)

so we are still trading, the computer is just doing the grunt work.

Horrible change in Wall Street culture (1)

GodfatherofSoul (174979) | more than 2 years ago | (#37354312)

To previous poster, the stock market is fundamentally designed to put people with cash on hand in touch with entrepreneurs with a need for investment capital. This is NOT what's happening here.

We had a client who bought one of our software libraries about 7-8 years ago and needed our help to build a trading app that employs these silly algorithms. These flash trading algorithms are exploiting market fluctuations that have little to do with fundamentals and sound investments. First you find a statistician to find stable market blips. If you've got instant access to the markets and wads of cash, you can exploit the fact that (hypothetical examples) there's a 2 hour dip in tech stocks when most IT staffs are in their Monday morning meetings. You can exploit the fact that private schools have orientation every 3rd Friday in August, so the NYC big wigs are all taking their kids to class and markets dip. Or that, on the Friday before the Super Bowl, Frito Lays sales spike for 4 hours because people are stocking up on chips for the game.

It's electronic money and I shudder to think what elements of our economy are being squeezed to generate it. The only thing that'll change this culture is to regulate flash trading out of existence.

Apparently they are unaware of the 1000 point drop (1)

Bob the Super Hamste (1152367) | more than 2 years ago | (#37354512)

There was 'no direct evidence' that the computer trading in itself increased volatility, it said, but in specific circumstances it was possible for a series of events with 'undesired interactions and outcomes' to occur and cause massive damage.

Apparently they are unaware of the 1000 point drop in the Dow [reuters.com] last year that appears to have been caused by HFT.

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