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This Is What Wall Street's Terrifying Robot Invasion Looks Like

Soulskill posted more than 2 years ago | from the skynet-begins-in-our-stock-markets dept.

The Almighty Buck 443

pigrabbitbear writes "Given the the endless mind-whirling acronyms, derivatives and structures of the financial markets, we're rarely served with a visualization that so elegantly illustrates the arrival of Wall Street's latest innovation. This is what High Frequency Trading — the official monicker of Wall Street's robot army — looks like, when specially programmed computers make massive bets at lightning speed. Created by Nanex, the GIF charts the rise of HFT trading volumes across all U.S. stock exchanges between 2007 and 2012. The initial murmur, the brewing storm, the final detonation: Not just unsettling, it's terrifying."

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Fund muh gaem!!! (-1)

Anonymous Coward | more than 2 years ago | (#40911087)

Halp me Slashdot! I need moneyz for muh gaem!! [indiegogo.com]

Luddite (0, Flamebait)

SuperKendall (25149) | more than 2 years ago | (#40911161)

It's only terrifying if you are some kind of luddite.

Everything is getting faster, with greater degree of computer involvement. Deal with it mentally or sell everything you own and go live in a cabin in the woods somewhere.

Re:Luddite (2, Interesting)

Anonymous Coward | more than 2 years ago | (#40911233)

You have an unusual viewpoint if you consider HFT to be progress.

Re:Luddite (4, Insightful)

SuperKendall (25149) | more than 2 years ago | (#40911551)

You have an unusual viewpoint if you consider HFT to be progress.

I consider it to be inevitable. Given that, you must learn to deal with it in whatever way suits you best.

I am all about reality, not hiding my head in the sand or spending my life trying to stuff worms back in a can.

Re:Luddite (3, Interesting)

rkanodia (211354) | more than 2 years ago | (#40911913)

Shouldn't it be pretty simple to stuff this worm back into its can?. Put a 1% tax on the sale price (not gains) for any stock which is held for less than 1 minute. HFT will instantly disappear. Human beings will never notice. What am I missing?

Re:Luddite (0)

Anonymous Coward | more than 2 years ago | (#40911279)

Put faith in computers! We've got that whole Therac-25 thing ironed out, we swear.

Re:Luddite (2, Interesting)

Daniel Phillips (238627) | more than 2 years ago | (#40911371)

It's only terrifying if you are some kind of luddite.

Correct. For the financial world it's the new normal. And actually, the financial landscape has now become more egalitarian than it ever has been because the cost of setting up a respectable high frequency operation is so low. Basically, you're looking at a few relatively inexpensive 1 or 2U boxes colocated at the trading venue sites and you're going to need to rent the fairly expensive high speed links between them. Way way way less than the traditional cost of setting up a bricks and mortor trading shop. Anybody can do it. Oh, but you'll need to write some software because nobody is going to give it to you at a price you can afford.

Re:Luddite (4, Insightful)

Anonymous Coward | more than 2 years ago | (#40911403)

Except the costs have gone up. Dramatically.

Remember that bull market back in 1999? NYSE upgraded their networks in the 3rd quarter of that year to handle a whopping 1,000 quotes/sec.

Today, you need to process 1.5 million quotes a second. Apples to apples. Well, except for the trading part, there, it's apples to rotten tomatoes

Here's a graph comparing growth in quotes and trading. http://www.nanex.net/aqck/2817.HTML

I'm all for more faster trading. But that demands increased transparency. I should know more about where my $20,000 trade executed and the route my order took than my $20 order from Amazon.

The real Luddites are those who like obscurity. Because if the markets were as transparent as they should be "with a greater degree of computer involvement", then the game wouldn't work.

The AC on transparency - how precious (-1, Flamebait)

SuperKendall (25149) | more than 2 years ago | (#40911531)

You and the guy who actually knows what the hell he's talking about (Daniel) should totally have it out, because he's claiming it's cheaper and you that it's more expensive...

Today, you need to process 1.5 million quotes a second.

For which we have computers. It's not like I need or want to see each one by hand.

Luddite.

I'm all for more faster trading. But that demands increased transparency. I should know more about where my $20,000 trade executed and the route my order took than my $20 order from Amazon.

Why don't you? Most online traders now offer more information than in the past, and you have many choices on where to make trades.

The mistake you make is thinking I value transparency less than you - in fact I care about it far more than you ever could (as if an AC would ever really support transparency). And that is why the use of computers is better, because it enables the transparency you crave.

Re:The AC on transparency - how precious (5, Insightful)

pla (258480) | more than 2 years ago | (#40911745)

And that is why the use of computers is better, because it enables the transparency you crave.

Could you define "transparency" for us? Because you don't seem to mean it the same way as the rest of the world.

HFT may indeed have created something resembling "transparency", but only insofar as it has made the entire market no more meaningful than a biased random number generator. What does it mean to conservatively invest in a company with strong financials and good growth potential, when entire sectors rise and fall with near-perfect correlation? Or more to the point, why do we even have a stock market?

If it makes me a Luddite that I believe "investing" should have at least something to do with lending someone with an idea money in exchange for a cut of the profits, then I'll accept that crown proudly. When "investing" means trying to game the underlying system, do we really wonder why the economy sucks?


We desperately need to implement at least one one of two really, really simple solutions - A transaction tax, and an end to intraday trading. Either of these would kill HFT overnight, and good riddance!

Re:The AC on transparency - how precious (1)

kwerle (39371) | more than 2 years ago | (#40911807)

Hear hear!

Re:The AC on transparency - how precious (1)

HiThere (15173) | more than 2 years ago | (#40911949)

Cheaper for who, and more expensive for who?

There's no real contradiction between the claims. It's cheaper for the trading houses. It's more expensive for those who aren't doing high speed trades.

I've also heard it claimed that the mechanisms used in high speed trading would be illegal if done by people instead of by computers. I'm not really into stock frauds, so I couldn't evaluate the claims. Something about "forward pruning"? The impression I got was that it involved making bids that you didn't intend to execute, so that you clogged up the system until it got to the price where you were willing to buy, but I'm not at all sure I understood this correctly.

Re:The AC on transparency - how precious (1)

iamwahoo2 (594922) | more than 2 years ago | (#40912101)

There is also a common procedure in which they make a bunch of bids but do not execute in order to find out out another persons price.

Re:Luddite (1)

tolkienfan (892463) | more than 2 years ago | (#40911657)

The HFT shops I've worked at are all for transparency.
Dark pools are considered inefficient.
When you trade on an exchange all the quotes, prices, volumes and trades are public. What else would make things more fair?

Re:Luddite (1)

gmuslera (3436) | more than 2 years ago | (#40911413)

matter how they are used too. So far looks like weapons of mass economy destruction

Re:Luddite (3, Informative)

Sir_Sri (199544) | more than 2 years ago | (#40911613)

That algorithm can be executed with or without computers.

Which is the problem in all of this. Any broad 'plan' can be executed just as well by hand as it can by HFT computers. People who are seriously concerned about shifting the entire value of a company or a market move billions of dollars in a single transaction and don't particularly care about nanosecond to nanosecond events.

Everything else is being scraped together the same way traders did before, only faster. Which isn't really good or bad. Stupid people made stupid trades, stupid people design bad algorithms and made stupid trades, people make mistakes, people programming computers make mistakes.

Re:Luddite (1)

tolkienfan (892463) | more than 2 years ago | (#40911689)

Based on what? Just increases in volume?
Grab your pitchfork!
I'd recommend waiting for a little more evidence.
So far all research into the subject has concluded the HFT is good for markets. But don't let facts dissuade you.

Re:Smash those looms (5, Informative)

PraiseBob (1923958) | more than 2 years ago | (#40911547)

You don't see anything slightly unusual about basing the financial underpinnings of our economy on computer programs that interact with each other and dictate the value of companies not based on actual profits, revenues, results, business methodology, strategic planning, or company history, but rather base the primary value of the company solely on the current trend of their stock, driving company value up and down in an attempt to exploit nanosecond timing to skim fractions of pennies off actual sales & purchases?

We've seen several examples of bugs in these programs that translate into financial ruin for not only the people running the bots, but random companies as well until the trades get reversed. How much faith do you have that out of hundreds of these bots, none have any bugs that pose a greater risk? (Knowing that all programs have bugs, and we've seen this exact kind of problem already happen due to bugs)

I guess I'm a luddite for wanting a financial system that pretends to be based on reality.

Re:Smash those looms (0)

Sir_Sri (199544) | more than 2 years ago | (#40911721)

basing the financial underpinnings of our economy

how exactly is the value of a collection of stocks the underpinning of the economy? Exactly as you said, companies have revenues profits etc. Those overall determine the value of a company. If an algorithm goes crazy and suddenly sells a 20.02 price stock for 0.002002 well some other computer or some person will realize that's an opportunity and buy it up. Whether or not the stock trades 100 times going from 19.02 to 20.02 or once doesn't actually change anything underpinning the economy.

You're also making the mistake of assuming that

not based on ...

You have some insight into this that the people who write the algorithms are missing because they're completely soul crushingly braindead and couldn't possibly even have read a basic business or econ 101 textbook to grasp simple concepts in stock pricing. They can, and do. And there are lots of ways to build HFT stock pricing assessments. Including sometimes shutting themselves off if something is happening that it can't interpret.

You're right that

bugs in these programs

are bad. But I hate to break it to you, people make mistakes too. Whether or not computers make *more* mistakes on average (or as is relevant more valuable mistakes as a whole) remains to be seen. Mistakes are also why you should have things like insurance.

Re:Smash those looms (1)

Sir_Sri (199544) | more than 2 years ago | (#40911731)

Gah, sorry missed a / on one of my quite tags and accidentally hit submit rather than continue editing.

Re:Smash those looms (1)

marcosdumay (620877) | more than 2 years ago | (#40912115)

If you don't want to face the risks of trading, you shouldn't trade. Period. What is wrong on your picture is that the trades were reversed. They shouldn't.

Stock fluctuations don't bring financial ruin to random companies, just for ompanies trading stocks or derivatives.

Now, about the actual topic. HFT is not a problem. High frequency cancelation of orders is. That's why everybody that researches HFT concludes it is not a problem, yet anybody can look at the market and see something is wrong.

Re:Luddite (2, Insightful)

c0lo (1497653) | more than 2 years ago | (#40911643)

It's only terrifying if you are some kind of luddite.

Everything is getting faster, with greater degree of computer involvement.

HFT is not wrong because it uses computers, HTC is wrong because the algos react only to change in prices and have no input whatsoever on the actual value of the enterprise behind the stocks. That is: the HTC reaction is based on the ones perception on the perception of the others - it is tolerable for low levels of "second hand perceptors" but... when the level of them is high, the risk of "computerized market panic" increases dramatically.

“To err is human, but to really foul things up you need a computer.”
(Paul Ehrlich)

“A computer lets you make more mistakes faster than any invention in human history–with the possible exceptions of handguns and tequila.”
(Mitch Radcliffe)

In other words: in HFT, the wrong is not the use of computers, but how you use them.

Re:Luddite (1)

marcosdumay (620877) | more than 2 years ago | (#40912145)

That is: the HTC reaction is based on the ones perception on the perception of the others - it is tolerable for low levels of "second hand perceptors" but... when the level of them is high, the risk of "computerized market panic" increases dramatically.

So, you mean that there is great oportunity for profit with anti-panicky bots?

Re:Luddite (1)

Eponymous Hero (2090636) | more than 2 years ago | (#40911717)

RTFA...

It’s certainly fair to say that if you take a long, five-year view, then you can see a clear rise in trading activity. But it’s also fair to say that there’s something quite literally out of control going on here. Just as the quants at Knight found themselves unable to turn off their machines for 30 long minutes last week, the HFT world in aggregate seemingly has a mind of its own when it comes to trading patterns. Or, to put it another way, if there’s a pattern here, it’s one incomprehensible to human minds.

deal with it mentally? that's the whole problem, buddy. we can't.

Re:Luddite (3, Insightful)

DM9290 (797337) | more than 2 years ago | (#40911767)

It's only terrifying if you are some kind of luddite.

Everything is getting faster, with greater degree of computer involvement. Deal with it mentally or sell everything you own and go live in a cabin in the woods somewhere.

if only the woods could actually support 7 billion human beings, we could all go live there. But since they can't, we'll need to figure out a way to be more productive than machines which are increasingly capable of performing more and more work that only a few years ago required a human being to do.

Just how many new occupations has the economy created in the past 20 years? How many occupations have been automated and rendered obsolete?

Unless we start paying people to have fun, enjoy themselves and frolick in the park there is not going to be much work left for anyone to do.

Re:Luddite (5, Interesting)

PopeRatzo (965947) | more than 2 years ago | (#40911771)

It's only terrifying if you are some kind of luddite.

You may not be aware that the derivatives market, where much of the high-frequency trading occurs, is valued at $791 TRILLION dollars (with a "T"). That's many times the total gross domestic product of the entire planet. And not one dime of that money represents anything that exists. It is not equity in a company that can be used to build a plant. It is not "shares of stock". It is not "money in the bank" that can be lent to individuals or companies.

When you've got that much wealth tied up in the virtual world, HFT could easily warp the value of the "real world". It can corrupt economies. A little hiccup in the derivatives market was all it took to cause an economic collapse in 2008 that is still being felt worldwide and has cost the United States upwards of $3Trillion just in ongoing bailouts and the rolling bailout knows as Quantitative Easing. That little hiccup is why your house is still only worth about half of what it was in 2007.

You don't have to be a Luddite to be concerned about the secretive, looking-glass world of "The Market".

Over dramatic much? (-1)

tomhath (637240) | more than 2 years ago | (#40911171)

Linked articles don't make a good case for "terrifying". The bank collapse was caused by the bubble burst, not the other way around. And it wasn't brought on by electronic trading.

Re:Over dramatic much? (3, Insightful)

19thNervousBreakdown (768619) | more than 2 years ago | (#40911183)

As one of the articles explains, HFT algorithms trade almost exclusively based on other trades. Guess what behavior is almost guaranteed to cause a bubble?

Re:Over dramatic much? (5, Insightful)

Adult film producer (866485) | more than 2 years ago | (#40911195)

Human behavior.

Bad (4, Insightful)

sycodon (149926) | more than 2 years ago | (#40911227)

Automated trading is a Bad Thing.

It is a joke to call it Market. It's no more than a Vegas Slot machine.

Re:Bad (0)

Anonymous Coward | more than 2 years ago | (#40911453)

No. These things make money. It's when they go into a always-sell or always-buy race condition, that it all goes horribly sideways.

You, on the other hand, could never interact with the market like this. So what it isn't, is fair and up-front.

Nonetheless, until shit goes south (error), HFT largely doesn't affect you unless you're the type to sell your wells fargo when you shouldn't.

Re:Bad (1)

tolkienfan (892463) | more than 2 years ago | (#40911753)

Caps don't make it true.
HFT is directly responsible for a reduction in spreads from 25c (or more) to 1c in liquid stocks. This takes money from the original market makers and gives it to the investors.
If a tax of, say 25c per stock, were imposed, HFT wouldn't bear the cost. The investor would. This is because the spread takes into account the cost of trading. No company can market make at a loss, and since they make less than 1c the spreads would necessarily widen. QED

Re:Over dramatic much? (-1, Troll)

tomhath (637240) | more than 2 years ago | (#40911377)

Neither the tech bubble nor the housing bubble were caused by trading. They were caused by a President's attempts at social engineering.

Re:Over dramatic much? (1, Interesting)

TooMuchToDo (882796) | more than 2 years ago | (#40911455)

Wrong.

http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money [thisamericanlife.org]

A special program about the housing crisis produced in a special collaboration with NPR News. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s?

Re:Over dramatic much? (4, Insightful)

EdIII (1114411) | more than 2 years ago | (#40911937)

Which President are you referring to? Disclaimer: I'm not taking any sides between Democrats and Republicans. They both screw us and give to their preferred 1%'s.

All of the damage was set in motion long before our current President took office.

What caused the housing bubble was no more than insatiable greed for ever growing profits from someplace.

It was not enough that you could sell a mortgage to another company within a couple of weeks at most with some properly filed paper work. We needed it faster.

It was too hard to go to court and actually fight with home owners when disputes arose over mortgages. No. No. No. We needed deeds of trust and laws to bypass due process and just kick people out of their homes without any way to defend themselves.

It was not enough to make origination fees off normal home buyers and package up their loans in huge instruments and sell them. We needed new loans that made speculative investors take interest and start buying more houses than ever before.

If was not enough to make huge amounts of money off the speculative investors. We needed to fuel the ever growing beast as fast as fucking possible for as long as fucking possible .

What did we get? Poor unsophisticated people with bad credit, low income, and no chance in hell of paying off a mortgage that was going to have monthly payments increase 50%-100% within 24-36 months.

All of those speculative investors that had short term goals for properties within the next 3-5 years? They're screwed proper.

All of those average home owners who were lured in by cheap home equity loans with people whispering in their ears that there was no bubble? Totally fucked.

Guess what?

YOU CAN'T BLAME THIS ON JUST *ONE* PRESIDENT.

Nice try though.

Re:Over dramatic much? (1)

Americium (1343605) | more than 2 years ago | (#40911397)

I think it had more to do with the government guaranteeing normal loans (subsidized by low FED interest rates), government subsidized loans and government entities buying sub-prime loans. If you were a bank, why wouldn't you make bad loans to sell to Franny and Freddy.

Re:Over dramatic much? (5, Insightful)

jpapon (1877296) | more than 2 years ago | (#40911647)

Because it should be fraud to make a bunch of bad loans, package them together, give them a high rating, and then sell them to the government (or anybody).

If I take droppings from a bunch of individual chickens, put them together, cook them a little, and then sell them as "Chicken derived high-fiber compound", I can't very well lie to you and tell you that I'm not selling you shit.

Re:Over dramatic much? (2)

Americium (1343605) | more than 2 years ago | (#40911695)

If I take droppings from a bunch of individual chickens, put them together, cook them a little, and then sell them as "Chicken derived high-fiber compound", I can't very well lie to you and tell you that I'm not selling you shit.

See hotdog.

Re:Over dramatic much? (5, Insightful)

hamster_nz (656572) | more than 2 years ago | (#40911225)

Bubbles exist when the market becomes disconnected from the true value (if there is such a thing!) of the asset...

I don't know much about HFT, but I am pretty sure that the HFT algos no nothing about the true value of the asset, and they are just gaming the markets.

When most of the trades in the market are traders trying to out-gaming each other, that can't be healthy.

Re:Over dramatic much? (1)

Americium (1343605) | more than 2 years ago | (#40911409)

HFT means high-frequency, not long term. Bubbles take years to develop, no microseconds.

Re:Over dramatic much? (5, Insightful)

TooMuchToDo (882796) | more than 2 years ago | (#40911475)

Knight Capital, a conservative market-maker, is going bankrupt because it's automated trading algorithms ran for 30 minutes in a poor configuration (losing money on each trade). How much did they lose? About $440 million dollars. In 30 minutes. Because someone didn't make it to the STOP command in time.

Not a bubble, just a way to destroy an organization in an automated fashion very quickly.

Re:Over dramatic much? (1)

rahvin112 (446269) | more than 2 years ago | (#40911605)

Just wait till two or three of these HFT machines goes wacko together and wipes out the entire market. These machines operate without human intervention. They buy and sell completely without human input. Now if 2-3 or more of these machines start operating in a repeating cycle with each other they could damage so many stocks simultaneously that in theory they could crash the entire market.

If the knight trades had been a little closer to sensible they could have triggered other HFT systems into buy and selling cycles. These things are dangerous IMO and they need some strict regulation such that they can't make trades worth more than the value of the assets in the company. Essentially margin rules that regular humans must abide. Even then I would still be concerned about the "perfect storm" problem where multiple HFT systems begin playing off each other and ride the market into a crash.

Chain reaction (0)

sourcerror (1718066) | more than 2 years ago | (#40911633)

Also, such bugs can distort the market price and trigger the stop-loss of other traders, thus creating a chain reaction.

Re:Over dramatic much? (1)

Ryanrule (1657199) | more than 2 years ago | (#40911635)

Now THAT would be some fun trolling.

Re:Over dramatic much? (4, Insightful)

pla (258480) | more than 2 years ago | (#40912027)

Bubbles take years to develop, no microseconds.

Not anymore. Thanks to the magic of computers, self-reinforcing feedback between a sufficiently large number of "traders" means the price can skyrocket or crash in a matter of minutes.

The Vile Offspring (1)

Guppy (12314) | more than 2 years ago | (#40912061)

Not anymore, with Economics 2.0 right around the corner. Charlie Stross's Accelerando seems increasingly prescient:

"...add a delay factor for propagation across the system, call it six light-hours across, um, and I'd say ..." she looks at Sirhan. "Oh dear."

"What?"

The orang-utan explains: "Economics 2.0 is more efficient than any human-designed resource allocation schema. Expect a market bubble and crash within twelve hours."

Re:Over dramatic much? (1)

jd.schmidt (919212) | more than 2 years ago | (#40911637)

Bubbles exist when the market becomes disconnected from the true value (if there is such a thing!) of the asset...

I don't know much about HFT, but I am pretty sure that the HFT algos no nothing about the true value of the asset, and they are just gaming the markets.

When most of the trades in the market are traders trying to out-gaming each other, that can't be healthy.

No, or rather that is how minor bubbles occur. Large bubbles are caused by an excess of investment dollars chasing too few good investment opportunities (aka, consumption) more or less by definition. People may have been attracted to do more investing by whatever reason, but truest value of a good or service is inherently ultimately based on consumption, not speculation.

The most important thing you needed to understand about investment dollars is they *MUST* be invested in something. If they just sit around, under a mattress for example, then they lose value and you come out even worse. Even gold is no true protection against a bubble, you just get a gold bubble. More or less this is one of the key reasons all the banks got carried along with their own "scams", they really are unable to just opt out. There certainly are some investors who are better than other, or at least better understand a particular situation, but as an overall effect a bubble is a correction of investment capital to match existing demand for goods and services. That is how everyone can lose money in the same game.

To be sure, you can have too little investment capital, we just don’t have that problem right now.

The greatest danger of HFT is probably to the types of investors that are compelled to act in a predictable manner for whatever reason, large mutual funds or retirement funds are excellent examples. But overall the creation and collapsing of bubbles rapidly is probably a benefit to the economy in that more quickly adjusts investment capital.

Re:Over dramatic much? (4, Insightful)

trout007 (975317) | more than 2 years ago | (#40911669)

You are missing a vital piece of information. You explain what a bubble is but not why it forms. The reason for most large bubbles is when currency is inflated and rates are set below a market rate by a central bank. This new money has to go somewhere and wherever it goes it causes a misallocation of resources. This can happen without a central bank but without an endless source of new money those bubbles tend to be small and burst quickly.

Also there is no such thing as the true value of anything. Value is completely subjective. Everyone values things differently. In fact that is the only reason anyone trades. I value the gallon of milk more than the price while the store values the money more than the milk. Nobody goes around trading things of equal value.

Re:Over dramatic much? (1)

pla (258480) | more than 2 years ago | (#40912137)

Also there is no such thing as the true value of anything. Value is completely subjective.

Don't act obtuse. Whether or not we can concretely call company X "better" than company Y, we can say that company X has no debt, a low P/E, and a high profit margin, while company Y owes its ass to the banks and loses money quarter after quarter. HFT completely ignores that in favor of "Company Q, with a correlation of 0.9 to company Y, just went up a penny, so buy buy buy Y!".

Re:Over dramatic much? (1)

Anonymous Coward | more than 2 years ago | (#40911401)

Linked articles don't make a good case for "terrifying". The bank collapse was caused by the bubble burst, not the other way around. And it wasn't brought on by electronic trading.

Pardon me for being so blunt here, but pull your head out of your ass.

The collapse was caused by a severe lack of deregulation, brought on by greedy assholes who didn't give a shit about anyone else but themselves.

Now go ahead and tell me how we're not staring at the same damn thing.

Oh, and then tell me again how there was so much done with the collapse before to actually deter or even stop those greedy assholes from doing it again.

Yeah, I'd say "terrifying" is a damn good word here.

Re:Over dramatic much? (1)

c0lo (1497653) | more than 2 years ago | (#40911715)

The collapse was caused by a severe lack of deregulation, brought on by greedy assholes who didn't give a shit about anyone else but themselves.

Is it a typo or intentional? If intentional, do you care to explain how less regulation encourages "the greedy assholes to give a shit"?

Someone explain to me... (4, Insightful)

Gavin Scott (15916) | more than 2 years ago | (#40911179)

...why high speed trading is a good idea for anyone? It seems like the equivalent of slash-and-burn agriculture where you're destroying a resource (in this case basically sanity) in exchange for a one-time benefit of briefly being faster than your competitors.

So can someone explain how the world is a better place than if, say, you could only issue one trade per second?

G.

Re:Someone explain to me... (5, Insightful)

LordLucless (582312) | more than 2 years ago | (#40911241)

where you're destroying a resource

...which isn't yours, and you have no long term interest in

in exchange for a one-time benefit of briefly being faster than your competitors.

...during which period you made several hundred million dollars.

Tragedy of the commons

Re:Someone explain to me... (1)

Anonymous Coward | more than 2 years ago | (#40911435)

Tragedy of the commons

Which doesn't happen as often when things are privately owned. There's a reason why cows outnumber bison by a million to one. If you go out in your cow field and blast them all dead with a shotgun, you have nothing left for the future. Nobody owned the bison so might as well kill as many as you can. Private ownership is key which is exactly what socialists oppose. Think about that for a moment.

Re:Someone explain to me... (1)

casings (257363) | more than 2 years ago | (#40911563)

That's an interesting point, because the socialistic societies of the indigenous is what allowed the bison to flourish.

So by your example, capitalism is the root of all evil because it is what causes the tragedy.

Re:Someone explain to me... (3, Insightful)

CrimsonAvenger (580665) | more than 2 years ago | (#40911673)

That's an interesting point, because the socialistic societies of the indigenous is what allowed the bison to flourish.

Note that there is some evidence that the Amerinds were well on the way to exterminating the bison after the Amerinds acquired horses.

It should also be noted that the reason they didn't exterminate the bison earlier wasn't their "socialistic society" but the fact that they were technologically limited to the point that it was impossible.

Note also that there is evidence that the bison population of the early 19th century, which is assumed to be "natural" was, at least partly, a result of the plagues brought from Europe wiping out the Amerinds who had previously limited bison numbers...

And note, by the by, that these same peoples seem to have managed to exterminate the megafauna in America in prehistoric times just fine.

Re:Someone explain to me... (1)

Hatta (162192) | more than 2 years ago | (#40911335)

So can someone explain how the world is a better place than if, say, you could only issue one trade per second?

The rich and powerful don't get richer and more powerful as quickly if you could only issue one trade per second. So HFT makes the world a better place, if you're rich and powerful, who are the people making the rules anyway.

Re:Someone explain to me... (2, Insightful)

the eric conspiracy (20178) | more than 2 years ago | (#40911355)

Market liquidity is extremely important. If you decide you want to trade your shares you want to be able to do so quickly and with a low trading fee. And you want to be able to get the same price no matter where you sell them, London, New York, Hong Kong.

A high trading volume facilitates this. A limit on how fast a broker can trade could cause people to be unable to sell their stocks if they want/need to.

Many experienced investors believe that the three most important things about an investment are liquidity, safety of principal and yield. In that order.

I remember when my father was investing in the stock market - an order to his broker would cost $150 to execute and take hours to process. And the price was fairly unpredictable. Now you can do an order at 1/20th the price, be pretty sure of what the execution will be because of the ability to place limit orders and get confirmation nearly instantly.

What we have now is much better than the olden days. Of course there are downsides but I think if you are aware of them you can avoid them.

Re:Someone explain to me... (1)

Hatta (162192) | more than 2 years ago | (#40911443)

Liquidity is good, but nobody needs their cash in microseconds.

Re:Someone explain to me... (4, Insightful)

Cryacin (657549) | more than 2 years ago | (#40911791)

Liquidity is good, but nobody needs their cash in microseconds.

Heh heh, I read that as Liquidity is good, but nobody needs their crash in microseconds.

Re:Someone explain to me... (1)

Telvin_3d (855514) | more than 2 years ago | (#40911863)

And yet both comments are appropriately true.

Re:Someone explain to me... (1)

Anonymous Coward | more than 2 years ago | (#40911517)

Absolutely right, liquidity is paramount

You should know, that HFT can and will detect any non-perfect input and vacate the premises immediately.

Just before Facebook's IPO, at 11:29:52, Nasdaq panicked and rebooted a major system resulting in 17 seconds of no trades or quotes for all stocks in its system. Within 100 milliseconds of Nasdaq coming back, orders from SPY and other important symbols vanished and never recovered to where it was before Nasdaq's outage.

Lesson: liquidity is there and will be there, as long as everything is perfect.

On the same note, try selling 1000 shares of an inactive stock sometime, and note the difference in perceived and realized liquidity

Re:Someone explain to me... (5, Insightful)

bertok (226922) | more than 2 years ago | (#40911527)

Market liquidity is extremely important.

Lets assume for a second that it is important to be able to trade a hundred times a second, which isn't even an exaggeration of what's already happening.

Then, logically, one would expect the entire financial world collapse every night when the markets close for hours.

Oh wait, nothing happens, and everything continues like normal the next morning!

Hence, the assumption that high-speed trading is vital is clearly false.

It's one thing to have a high volume of real trades, but it's entirely another thing to have a ludicrous volume of very small meaningless trades by third-parties that neither want to buy nor sell, but just want to "play the game" and skim off the top.

Re:Someone explain to me... (1)

frosty_tsm (933163) | more than 2 years ago | (#40911699)

Mod parent up. +1 informative.

Re:Someone explain to me... (2)

sourcerror (1718066) | more than 2 years ago | (#40911687)

A high trading volume facilitates this.

HFTs don't trade in low volume market anyways, so the liquidity argument is bogus. On the other hand they add systemic volatility (see the Flash Crash).

Re:Someone explain to me... (1)

phantomfive (622387) | more than 2 years ago | (#40911865)

On the other hand they add systemic volatility (see the Flash Crash).

If you are a value investor, then a flash crash will not hurt you. You will own the stock because you know it is a good deal, and if the market drops, it will still be a good deal. You know the price will come back, and when you want to sell, you'll be able to.

Warren Buffet is a value investor, was he afraid of the flash crash? Was he afraid of the longer crash in 2008? No, he waited until equities were a good price, and he bought. He didn't guess the bottom, but he saw they were a good price, and so he made a lot of money.

High frequency trading hurts day traders, it doesn't hurt value investors.

Re:Someone explain to me... (4, Insightful)

Hentes (2461350) | more than 2 years ago | (#40911805)

Liquidity is only important for the gamblers. Real investors who plan to put their money into a share for years can afford to wait a few days for a good offer.

Re:Someone explain to me... (2)

Telvin_3d (855514) | more than 2 years ago | (#40912011)

Market liquidity is extremely important. If you decide you want to trade your shares you want to be able to do so quickly and with a low trading fee.

It's obvious that this is extremely important... if your business model is based on many fast sales at low fees. But it's hard to see how millisecond transactions provide any benefit to the kind of shareholder that actually invests in businesses and expects to still be holding their shares weeks, months, or even years after having bought them. It's also hard to see what benefit the companies in question gain form having their share price bounce around by the millisecond instead of by the second or even the minute.

In short, I have yet to see anyone explain how extreme market liquidity of the kind pushed by the high frequency traders provides any significant benefit to anyone who is not also engaging in variations of high frequency trading. So, if you can, please explain how anyone not engaged in HFT would be negatively affected if all trades happened once a second, or even once a minute. And please have more of an answer than 'the HF traders would go away'. I am not trolling, I am genuinely curious what you think the general downsides would be.

Re:Someone explain to me... (0)

Anonymous Coward | more than 2 years ago | (#40912067)

A limit on how fast a broker can trade could cause people to be unable to sell their stocks if they want/need to.

Suppose orders were queued every 100ms, which is sometimes cited as the minimum human reaction time, and then processed in batches. No actual human would notice the difference, so how could that cause people to be unable to sell their stocks?

Re:Someone explain to me... (1)

anubi (640541) | more than 2 years ago | (#40911363)

Its called "tragedy of the commons".

Been involved in the Stock Market 30+ years (0, Informative)

Anonymous Coward | more than 2 years ago | (#40911389)

Back in the day - 1980s early 90s - when you wanted to buy a stock, you ballparked the transaction costs at a quarter one way. In other words, add $0.25 per share to the asked price if you were buying or subtract $0.25 from the bid price if you were selling. That's $25 for one hundred shares and most retail brokers charged more. I remember buying 50 shares of IBM and paying over $60 in dealer spreads, exxchange fees and broker commissions.

Today, I can buy those sames shares with a transaction cost of $0.05 per share dealer spread plus $7.

That reduction in dealer spread is because of HST. Now, that $20 or so is much better in MY pocket than in some overpaid salesman who just filled out a ticket back in the day. Yes, part of the lower cost has been changes in the law and because of the internet. But the DEALER SPREAD - thank HST.

Volatility? Is up -BUT because of all those computers fighting, the NET volatility is less - if that makes anysense. Second by second, things are all over the place, but minute by minte - day by day, things are a bit more stable. I remember the days of a stock up a few bucks and then down a few bucks just because of news - and there wasn't a computer there to counter act that because its model said the price movement was bullshit.

Although, when those computers flake out, the shit hits the fan but I don't give a shit. I'm a value Benjamin Graham type of investor.

tl;dr - for value "hold'em for while" retail investors, things have gotten a bit cheaper for us.

Re:Someone explain to me... (1)

Americium (1343605) | more than 2 years ago | (#40911469)

It would just take longer for markets to equlibrate. Less volume, more volatility. Higher transactions costs. I think of HFT as just how markets work. It should be less and less profitable as we move forward and algorithms and cpu cost goes down. Market makers giving certain companies HFT advantages to make massive profits and charge the buyer a higher price, are clearly monopolistic practices that go against everything HFT is designed to do.

Re:Someone explain to me... (1)

LordArgon (1683588) | more than 2 years ago | (#40911811)

I don't particularly *like* HFT but I have a lot of trouble understanding the hate. It's not Wall Street's job to make the world a "better place." It's a *market*. That's it. Trading stocks is speculation, no matter how long you hold the stock.

If you place your entire financial future in the hands of trading algorithms, you live or die by them, regardless of how fast they execute. If you deploy a poor algorithm and your business goes bankrupt... oh well, guess you took a huge risk, didn't have appropriate failsafes in place, and now you're out of business. Why is this a tragedy for everybody else?

the problem with this article... (1)

ThorGod (456163) | more than 2 years ago | (#40911215)

No where does the author define the units at play, EXPLICITLY.

So, I'm guessing that it's the volume (number of) shares traded on a specific day, on a minute basis throughout the entire business day. Multiple data are included, representing the various trading markets in the US.

That makes:
x: time (from 8 am to 4 pm, eastern time)
y: shares traded at time x (multiplier? could be x10^1, x10^7, or who knows)
chart title: the specific day depicted

Re:the problem with this article... (1)

rickb928 (945187) | more than 2 years ago | (#40911269)

'minute basis' is the wrong metaphor. microseconds are the current unit of measure.

Re:the problem with this article... (1)

ThorGod (456163) | more than 2 years ago | (#40911337)

Yes, but I'm not sure it's the current unit of basis IN THAT GRAPH.

Re:the problem with this article... (1)

bzipitidoo (647217) | more than 2 years ago | (#40911485)

I think the whole notion is a diversion.

The market collapsed because of massive fraud, especially in the home mortgage finance business. The criminals who stole our wealth would love to blame it all on computers, high frequency trading, Europe, oil, God, or whatever. Anything but them.

Guess computers are the whipping boys for the moment. There may be inherent problems with high frequency trading, but no one is sure. What we can be sure of is that fraud, insider trading, and excessive executive compensation hurts the market.

Re:the problem with this article... (1)

ThorGod (456163) | more than 2 years ago | (#40911841)

If you read 1929: The Great Crash, by John K. Galbraith (http://en.wikipedia.org/wiki/The_Great_Crash,_1929), you'll see a pretty good picture of what happened between 2002-2007.

Then there's Case and Shiller's 2003 article. Mind you, their article was published in 2003 and describes erratic behavior in housing markets across several US cities.

In short, many of the same things that went wrong in the 1920s went wrong in the 2000s. The difference is that, this time, we actually had academics (at universities and at the Fed) who were basically ignored or powerless to act. Hell, I've seen interviews where Alan Greenspan says exactly what I just said. He even added that, after consulting hundreds of math professors across the academic world, they (the Fed) couldn't figure out what many of the "investment instruments" represented.

Anyway...that wasn't all that related to the units on the axis of the charts.

Terrorism (0)

Anonymous Coward | more than 2 years ago | (#40911251)

This kind of finance is the real terrorism : they're at war against the people.
It makes me sick.

Fuck the system, or the system fucked itself. (1)

burni2 (1643061) | more than 2 years ago | (#40911255)

Yeah, capitalism will .. survive for sure, because you need shotgun and canned food to survive the post broker war era ;)

Scary, but very cool (2)

GeneralTurgidson (2464452) | more than 2 years ago | (#40911261)

Wall Street is really pushing the envelope on high performance computing and programming. It's hard to not be impressed by the hardware and performance.

Re:Scary, but very cool (2, Funny)

Anonymous Coward | more than 2 years ago | (#40911339)

Yes, they are working on the next gen, its something called Skynet. I hear that will really blow you away!

Re:Scary, but very cool (1)

c0lo (1497653) | more than 2 years ago | (#40911763)

Wall Street is really pushing the envelope on high performance computing and programming. It's hard to not be impressed by the hardware and performance.

It is also hard not to be impressed by an A-bomb. Do I have to stop worrying and love it?

Remember when... (1)

ackthpt (218170) | more than 2 years ago | (#40911341)

Owning stock in a company actually mean owning as share in the Goods the company was going to sell?

Seems almost alien in today's world of baffling bulls**t which is what we get out of Wall Street. Makes Calculus look like finger painting.

Reminds me of TradeWars 2002... (2)

Max Threshold (540114) | more than 2 years ago | (#40911477)

There's an interesting parallel between the bots and scripts people use to play TradeWars 2002 and the bots and scripts people use to trade on the stock market. It seems to me that the TW2002 arms race may serve as a model for understanding the fundamental problem and what Wall Street or government regulators might be able to do about it.

The other half of HFT (1)

MasseKid (1294554) | more than 2 years ago | (#40911561)

Is they bring near unlimited liquidity to the market. They also don't move valuation, and they only compete against themselves to make the market more liquid thus reducing the actual profits they are "siphoning off the top". It's a race to the bottom alright, the bottom of HFT profits. Or do you'll believe that if they achieve another few order of magnitude of frequency, suddenly they'll drain the entire market of all it's value in a single day?

Re:The other half of HFT (1)

ThorGod (456163) | more than 2 years ago | (#40912227)

The econ in me hopes it'll make the market more efficient ( http://en.wikipedia.org/wiki/Efficient-market_hypothesis [wikipedia.org] ). But, surely the stock market is already vastly more efficient than slow movers like real estate.

More uninformed bad press (4, Informative)

tolkienfan (892463) | more than 2 years ago | (#40911577)

This is what you get when the uninformed do journalism.
This article has only HFT volumes to go by, and yet draws some dark conclusions about the future.
It's all nonsense. I've been in HFT since before the beginning of the animation. I can say that the trades are mostly very simple. They are written with great care and attention to risk. HFT shops have no unfair advantage - like any trading company they put up risk and capital in order to attempt to make a profit. And when things go wrong they can lose bug and fast. The reason for growth in HFT is partly due to how easy it really is.
More and more trading companies are trying to enter the game.
HFT is like Target. They cut margins to next to nothing and make it up with volume.
Knight is really a good example. They had the worst case scenario: heir robots were buying and selling on bad information and their risk systems didn't detect it. Bad for Knight. But did it crash the whole market? Did it have the same effect as the mortgage CDO fiasco? Not at all. HFT shops aren't leveraged. If they put up $1 they could lose $1. And often they do.

I, Robot (1)

ianare (1132971) | more than 2 years ago | (#40911591)

Asimov's vision of the world economy being controlled by machines has become reality.

Unfortunately for us, the machines we actually put in place bear little resemblance to those he described. Instead of being programmed with the 3 laws, and therefore a help to mankind by eliminating poverty and famine, we have programmed them to enrich the few at the expense of the many.

Such a system can not, and will not, be sustainable - as History so abundantly proves.

Re:I, Robot (1)

Un pobre guey (593801) | more than 2 years ago | (#40911933)

1) History shows that such a system will be applied as widely and as intensely as possible as long as someone is making money from it
2) Asimov's laws of robotics are and have always been ludicrous. Intelligent robots will never be developed where such rules can be reliably enforced by the robot itself. It just doesn't work that way.

Soothing ... (0)

Anonymous Coward | more than 2 years ago | (#40911617)

It's like sitting in front of the fireplace... Would have been nice to have a brandy though.

Re:Soothing ... (1)

Un pobre guey (593801) | more than 2 years ago | (#40911897)

... or a violin

The perspective of a trading system programmer (3, Informative)

jgotts (2785) | more than 2 years ago | (#40911711)

For around seven years I programmed a derivative trading system. Unfortunately our company went out of business due to lack of capital and possibly because our large competitors were cheating (not obeying firewalls between trading for customers and trading for themselves).

I view high-frequency trading (HFT) as great for society. Here is why: What HFT gives you is the fairest and most accurate (best) price for something. When there are many, many trades, the price gap between the individual trades becomes so low that there is no chance that you'll pay too little or too much for something or that you'll wait too long for your trade to happen. I'm talking about people who just want to buy something, not HFT traders.

You're hungry and you want to cook yourself dinner. Your dinner is made up of commodities that are traded, except perhaps for the parts that you bought at the local farmers market. But you and the farmer used gas and a vehicle of some sort to make the transaction. If you rode your bike, your bike is lubed with oil and made of steel, etc. With HFT in play, everything that went into the transaction was bought and sold at the fairest price possible. Nobody got gyped because of low market volumes that day, and nobody had to pay a gigantic fee to a broker because the cost per transaction is now tiny.

Of course you have issues like the flash crash. The best way to look at the flash crash is like this. Shares of John Gotts (JG) are worth $40, based upon fundamentals (intrinsic worth) and an idea about the future. Somebody sold a gigantic number of shares of JG for $20. Excellent computer algorithms put in buy orders for JG at $15 and possibly foolish computer algorithms found a way to sell shares of JG at that price, foolish if they bought the shares for more than $15 or smart if they bought the shares for less. The spiral kept going downwards due to both foolishness and intelligence. You can see that there were many, many winners. Every algorithm that bought shares for JG at less than $40 had the potential for a huge windfall. There are no rules against creating an intelligent HFT to look for mini-flash crashes and make a killing as a result. Fortunately or unfortunately, many of the trades that did happen were unwound by the exchange.

Finally, what I need to stress here is that computers aren't trading with other computers. Teams of programmers working with traders are writing code that does their bidding. The computer is the trader's tool, not the trader itself.

My conclusion: No to financial transaction tax! (5, Interesting)

200_success (623160) | more than 2 years ago | (#40911725)

From this, I would draw the opposite conclusion: we should oppose proposals for a financial transaction tax at all costs! If high-frequency trading is the disease, then a tax on transactions is not the cure. It would make government addicted to the new revenue and therefore dependent on the high-frequency traders, thus ensuring that those leaches will never go away.

A better solution, I think, would be to require stock exchanges to operate on a once-per-second clock. Any trade orders that arrive within each timeslice would be executed in a random order, so as to defeat any advantage the high-frequency traders would get by being fast.

Re:My conclusion: No to financial transaction tax! (1)

Telvin_3d (855514) | more than 2 years ago | (#40912073)

Or, instead of a clock, have a minimum hold time. If you need to buy some shares RIGHT NOW you are free to buy them as fast as the order can be processed. But they can not be sold again for a full minute. Or even an hour!

And if holding the shares for an entire minute is a problem, them I don't think 'investing' is a very good descriptor of your actions in the first place.

A major problem are the cancellations (5, Interesting)

cpm99352 (939350) | more than 2 years ago | (#40911727)

To repeat my comments from just a few days ago [slashdot.org] , the fine article [caseyresearch.com] states on page 4:

Many HFTs will make near-simultaneous trades on different exchanges and profit because of the delay in one of the exchanges. An example will help me explain: let’s use the NASDAQ and EDGE exchanges, and say that ABC stock is trading at $1.00. The HFT will send a bunch of quotes (offers) to NASDAQ and EDGE, trying to sell ABC stock at $1.01. Once the NASDAQ order is accepted, the HFT can simultaneously cancel the $1.01 sell order on the EDGE exchange and replace it with a buy order at the original price of $1.00. EDGE immediately accepts that $1.00 order, because its system has not caught up to the new price of $1.01, and the HFT’s net position becomes zero. This is possible because of latency, which is jargon for delay in the system. The net result is, the HFT captures a $0.01 arbitrage. By scalping this tiny amount from many trades, the profits add up quickly

Let's repeat: the HFTs are putting orders on the system for which they have no intention of fulfilling. This is a violation of SEC rules, yet the SEC does nothing. There was an AC responder to my post who made a blanket denial cancellations were happening. Care to respond?

What does the animation even mean? (1)

gibbo2 (58897) | more than 2 years ago | (#40911993)

It's hardly "terrifying" when I have no idea what either of those unlabelled axes are supposed to represent.

Just showing something getting bigger over time is not really useful information.

Question for HFT folks (1)

Un pobre guey (593801) | more than 2 years ago | (#40912009)

It looks like there are a few HFT types on this thread. For mere mortals with no access to this stuff, what aspects of the equities markets are left uncovered and exploitable as traders move towards these new algorithmic tools? What kinds of lucrative medium term trades are made available (if any) by this that were previously big centers of attention but no longer?

Sounds like its hanging on by a very thin thread (0)

Anonymous Coward | more than 2 years ago | (#40912103)

Could be a great way to destroy a vast majorty of the corrupt capitalist system, and reset some clocks

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