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Have We Hit Peak HFT?

Unknown Lamer posted about a year ago | from the if-that's-what-you-call-economic-collapse dept.

The Almighty Buck 476

CowboyRobot writes "There was a time when people wanted the fastest networks so that they could trade at lightning speeds. They deployed the smartest formulas at trading venues where no one could know who was asking for that big block of stocks on the other end of the deal. It was a wild time and people made a lot of money along with some very unwise decisions. Wall Street seems to be acting out the lyrics to a Don Henley song. The party's over, the hangover is raging and no one really knows what happened the night before. The number of shares traded via high-frequency trading are down and politicians want to roll out a tax to serve as a speed bump. Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio want a .03 percent tax on nearly every trade in nearly every market in the U.S. Some are wondering if microsecond dealings are poised to fade away. As the founder of HFT firm Tower Research Capital Mark Gorton puts it, 'The easy money's gone. We're doing more things better than ever before and making less money doing it.'"

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Good (5, Insightful)

clickclickdrone (964164) | about a year ago | (#44037301)

HFT is a symptom of a deeply broken system. We need to really start to recognise that profit isn't all and long term stewardship of our instituitions and systems is key to our long term quality of live. For everyone.

Re:Good (2)

unique_parrot (1964434) | about a year ago | (#44037321)

Yeah, I think so too, therefore it should be MUCH higher than 0.03%.

Re:Good (5, Insightful)

Anonymous Coward | about a year ago | (#44037343)

It's 0.03% on everything, not just HFTs, so it has to be small. The intent is to tax people who make money on trade volume rather than on trade value, which is a larger issue than just the speed at which trades are executed.

Re:Good (2)

StripedCow (776465) | about a year ago | (#44037363)

If the intent is to tax people on trade volume, then why not tax per volume traded?
Geez.

Re:Good (0)

gd2shoe (747932) | about a year ago | (#44037415)

Because volume can be pretty darn arbitrary.

A company "worth" $1G may have 10k shares at large, or it may have 100k shares at large. If someone wants to buy $100 worth of a company, a tax per share is ludicrous.

Besides, a 0.03% tax is bad for everyone. It's a stupid "rich people are too rich" type of move. Way too much of our economy is tied into the stock market. Taxing it directly is only going to send ripples into the rest of the economy. Before we do anything like this, we first need to disentangle ourselves. (a long and painful process that very few are willing to consider for even a brief moment.)

Re:Good (3, Interesting)

StripedCow (776465) | about a year ago | (#44037441)

Ah, but you didn't consider the effect this will have.
The result will be that share prices become normalized in a certain sense. Not too large to allow trading, not too small to allow reasonable trade taxes.

Re:Good (2)

gd2shoe (747932) | about a year ago | (#44037463)

No, it will encourage expensive shares only. The more expensive the share, the less tax paid by large investors. It will lock small investors out of more institutions.

Re:Good (4, Insightful)

StripedCow (776465) | about a year ago | (#44037543)

Anyway, the tax should of course be on short-term investments.
The shorter an asset is kept, the higher the tax should be.

If this is too difficult to implement, then perhaps a tax per transaction will do, indeed.
If a HFT trader makes a profit of 0.03% per transaction then this tax will make HFT trading unprofitable, while leaving long-term investments mostly untouched.

The effect will be that the frequency of trading will go down. The question is whether that will be sufficient. (Holding on to a stock for a day instead of a few milliseconds is not going to be a huge improvement in terms of long-term investment and long-term vision).

Re:Good (1)

macson_g (1551397) | about a year ago | (#44037575)

And what about other assets, like currencies? Should they be taxed in similar way?
You may not be so familiar with this in the US, but here in Europe, despite the Euro, people exchange currencies (effectively buying.selling financial instruments) quite often.
It may not be big thing for a traveller, but a currency-exchange kiosks are doing tons of small transactions very frequently.

Re:Good (1)

StripedCow (776465) | about a year ago | (#44037611)

Tax them! These speculative transactions do not add value to the economy.

Re:Good (2, Insightful)

sjames (1099) | about a year ago | (#44037743)

They are already charging you for the currency exchange, why not a tax?

Keep in mind, the proposal is 3 one hundredths of one percent. That is 3 cents on $100.

Re:Good (1)

Sique (173459) | about a year ago | (#44037577)

In a way, it is already. If you trade 100 times for $10,000 each, you have to pay $300 tax. If you trade only once for $10,000, you have to pay $3. Thus trading once and then keeping it and intentionally missing the next 100 trade opportunities is rewarded.

Re:Good (1)

king neckbeard (1801738) | about a year ago | (#44037837)

It doesn't get rid of day trading in a meaningful way, but it does bring the trading back down to the human level, where it does actually add something to the system. Day trading happens because an asset is perceived as differing from what it's actual value is, while, as I understand it, HFT is essentially manipulating the supply and demand for microseconds to shave off a profit.

Re:Good (2, Insightful)

Lumpy (12016) | about a year ago | (#44037615)

Really? 0.03% will lok out small investors? If 0.03% makes things too expensive for you then stop trading in penny stocks.

Re:Good (0)

Anonymous Coward | about a year ago | (#44037947)

What? How can a tax that is percentage based (0.03%), favor more expensive shares? Clearly, one of us missed something.

Re:Good (0)

Anonymous Coward | about a year ago | (#44037567)

It's amazing how many clueless posts begin with a condescending "ah".

Re:Good (0)

Anonymous Coward | about a year ago | (#44037425)

But it is 0.03% of the volume traded, so it is "per volume traded". Or do I missunderstand?

Re:Good (5, Informative)

SlashV (1069110) | about a year ago | (#44037431)

then why not tax per volume traded?

It *is* taxed per volume. 0.03%, which it nothing for a normal transaction. But for someone who buys and sells the same stock a hundred times per day, just to profit from tiny fluctuations in the stock value, it's 3%. This will kill the ridiculous business of racing for fastest connection and smartest trading algo, which is *good* because it is a ridiculous and useless business.

Re:Good (2, Insightful)

Rockoon (1252108) | about a year ago | (#44037645)

This will kill the ridiculous business of racing for fastest connection and smartest trading algo, which is *good* because it is a ridiculous and useless business.

That is not a reason to consider it "good." Essentially you are saying "I dont like how he makes money, so lets punish him"

For it to be "good" there needs to be a positive effect. Please explain what the positive effect is, because I dont see it. I see the HFT offering bids and asks that are better than everyone elses .. how is discouraging better prices for both buyers and sellers a good thing?

Seriously.. explain it to me without resorting to a hatred. Explain to everyone why it is that when they get a higher price when they sell and a lower price when they buy that its "bad." I happen to like paying less for things when I buy, and getting more for things when I sell.

Re:Good (0)

Anonymous Coward | about a year ago | (#44037679)

That's not what's happening. You are being front-runned.

Re:Good (1)

Rockoon (1252108) | about a year ago | (#44037749)

That's not what's happening. You are being front-runned.

I know that people claim that its not what is happening, however the peer-reviewed research says different.

Re:Good (4, Informative)

sjames (1099) | about a year ago | (#44037773)

Jim has an apple. He calls out, who will give me 50 cents for this lovely apple. Jon likes apples so he heads over. Just as he raises his hand to call out, flash the wonder trader bumps him into the gutter and buys the apple from Jim (even though he hates apples). He then offers it to Jon for $51 cents.

Not only is that rude, but eventually you'll get popped in the nose for it.

Re:Good (0)

Rockoon (1252108) | about a year ago | (#44037859)

The problem with your analogy is that while Jim put out an 'ask' for $0.50 there clearly were no 'bids' for $0.50. The best bid was at most $0.49 .. your Jon character is imaginary because nobody was actually looking to buy at $0.50 to begin with. If this wonder trader picked up the Apple for $0.50, then Jim made an extra $0.01.

Re:Good (5, Insightful)

sjames (1099) | about a year ago | (#44037903)

If you're just going to throw chaff, I'll say that flash prevented Geoff from buying the apple from Jim for a dollar and giving it to Jon just because.

The simple fact is that if you put two people in a room who want to make a transaction, they will do so if both are reasonable. Both lose if someone inserts themselves into the deal and bleeds a few cents out. The HFT make money somehow, and since they DO play a zero sum game, that means they make it by causing others not to.

Re:Good (0)

Rockoon (1252108) | about a year ago | (#44037951)

The simple fact is that if you put two people in a room who want to make a transaction, they will do so if both are reasonable.

No sir, thats not a 'fact'

If you put two people in a room, they only trade if its mutually beneficial. That, my friend, is the fact. The HFT only comes into play when those two people do not see eye to eye.

Re:Good (0)

Anonymous Coward | about a year ago | (#44037883)

That is not really how HFT works.
It is more like Jim has an Apple and he wants 50 cents for it, Jim has been trying to sell this apple for 50 cents for the last half an hour.

Then the weather report comes in that Apple seeds will become more expensive, Apple seeds are the underlying of Apples. So in the future apples will cost 53 cents. A flash the wonder trader quickly decides to buy the Apple for 50 cents before it get more expensive, then he starts selling this apple for 52 cents.

If Jon wanted that apple for 50 cents he could have bought it when it was 50 cents.

I suggest you start playing eve online before you make yourself look stupid.

Re:Good (0)

sjames (1099) | about a year ago | (#44037925)

If you thing HFT reacts to *news*, then you would be the stupid one. HFT reacts to trades. They don't yet have AIs that can watch the news live and make a trade decision based on it in milliseconds.

Jon did want that Apple at 50 cents and tried to buy it but flash had low latency connections half a rack closer.

Re:Good (1)

foniksonik (573572) | about a year ago | (#44037955)

No. That's how normal futures trading works. HFT works exactly as the parent described. In your scenario there is no need for HFT.

The problem now is that all of the major players use super fast systems (to enable HFT) so they are now on an even playing field and can't easily bump each other so even normal trade is happening at high speeds.

Re:Good (4, Insightful)

TheDarkMaster (1292526) | about a year ago | (#44037793)

Is good. HFT distorts the purpose of a stock exchange, the idea of having shares in a company to help it to capitalize, make it succeed and you earn a share of the profits in return. A company needs partners (the shareholders), not parasites.

Re:Good (3, Insightful)

gbjbaanb (229885) | about a year ago | (#44037865)

there was an example of the broken financial system on the news last night.

Basically Guinea (IIRC) has some mountains that are 60% pure iron, so the (allegedly corrupt) dictator of Guinea gave the mining rights to an (allegedly dodgy) mining company.

Said company then didn't bother to mine the iron, instead it used the backing of having a huge iron asset to make trades on the markets and made a load of cash that way. Meanwhile the people of Guinea are dirt poor with no hope of even getting jobs digging said iron out of the ground for 10p a day, let alone seeing the extraction of the iron benefit the country's economy.

This is one way of seeing why a financial market that does nothing but deal within itself is a bad thing. If we changed focus so stock markets were tied to something in the real world (eg Microsoft profits, or Apple growth) no matter how tenuous, that you held for some time because of that real-world item's worth wrt the stock then we'd see stock markets become more investment based and less trade based.

We might as well base the stock market on TV shows - you could trade on the love life of some TV character without any difference with how financial companies trade today.

Re:Good (1)

heathen_01 (1191043) | about a year ago | (#44037907)

there was an example of the broken financial system on the news last night.

Basically Guinea (IIRC) has some mountains that are 60% pure iron, so the (allegedly corrupt) dictator of Guinea gave the mining rights to an (allegedly dodgy) mining company.

Said company then didn't bother to mine the iron, instead it used the backing of having a huge iron asset to make trades on the markets and made a load of cash that way. Meanwhile the people of Guinea are dirt poor with no hope of even getting jobs digging said iron out of the ground for 10p a day, let alone seeing the extraction of the iron benefit the country's economy.

This is one way of seeing why a financial market that does nothing but deal within itself is a bad thing. If we changed focus so stock markets were tied to something in the real world (eg Microsoft profits, or Apple growth) no matter how tenuous, that you held for some time because of that real-world item's worth wrt the stock then we'd see stock markets become more investment based and less trade based.

We might as well base the stock market on TV shows - you could trade on the love life of some TV character without any difference with how financial companies trade today.

That is a problem with the mining contract (and possibly the corrupt dictator) - not the financial system.

Re:Good (2)

michelcolman (1208008) | about a year ago | (#44037875)

Money doesn't get created out of thin air. If HFT firms are making money, other investors are losing exactly that money. For example, patient investors who have put a limit order in and are waiting for someone to take it. They'll be consistently below the "improved" price and their order never gets executed.

No matter how you try to explain it, the HFT profits are coming from other investors' pockets, the stock market is not magic.

HFT improves liquidity? That sure explains all the mini-meltdowns we've seen recently. Very liquid indeed.

And when a stock starts going down, the difference in liquidity is a spread of 20.01 - 20.02 instead of 20.01 - 20.1. Don't expect to sell at a better price thanks to HFT algos. And when a stock goes up, it's the other way around obviously. These algos make money for their owners and that's their only purpose.

Re:Good (1)

Anonymous Coward | about a year ago | (#44037937)

By the same logic, retail is theft.

I mean, if Amazon is making money, their suppliers must be losing money. Right? You were totally willing to go straight to each supplier, doing more work shopping around and signing up with multiple payment systems, and then pay the same for worse processing & dispatch.
Or were you willing to pay for convenience?

Anyway, the people hurt by HFTs are mostly old-school brokers, and they're hurt because they they charged wide spreads and large commissions, to cover the cost of their inefficient risk management. And also because they could, because it was an almost closed shop and there was little competition. HFTs take their business by offering a better price, which they can afford to do because they use automation to manage their risk and inventory more efficiently.

If you're a retail customer (rather than a day trader) or you have a pension, you benefit from this.

Re:Good (0)

Anonymous Coward | about a year ago | (#44037745)

It *is* taxed per volume.

It *could be* taxed per volume.

Re:Good (2)

Paradise Pete (33184) | about a year ago | (#44037583)

Even the 3 cents per $100 quickly adds up. It would kill liquidity and widen spreads. You're addressing one problem by creating a new and more damaging one.

Re:Good (-1, Flamebait)

Rockoon (1252108) | about a year ago | (#44037657)

He doesnt care. His opinion is fueled by hatred rather than rationality.

Those evil HFT's offer the best prices on both bids and asks, but that doesnt matter.. because they make money at it and making money that way is apparently so much pure evil that the positive effects it has are irrelevant.

Re:Good (0)

Anonymous Coward | about a year ago | (#44037673)

Such a Strawman. When did you receive your nobel prize in economics, Mr. Tobin?

Re:Good (0)

Anonymous Coward | about a year ago | (#44037763)

Because a sniper's a sniper, whether it's eBay or stocks.

Re:Good (1)

sjames (1099) | about a year ago | (#44037815)

Those evil HFT's offer the best prices on both bids and asks,

Unless they are deliberately giving away an endless stream of money, that is literally impossible.

Re:Good (2, Informative)

Rockoon (1252108) | about a year ago | (#44037919)

Unless they are deliberately giving away an endless stream of money, that is literally impossible.

This from the person that doesnt even know that there is a difference between bid prices and ask prices. It is only within this difference that the HFT's can make a profit, and they can only do so if they reduce that spread.

Until you have an argument that acknowledges that there are two prices, we can only presume that you dont have any clue at all what you are talking about. For the record, the amount of peer reviewed research on the subject [google.com] is legion. Perhaps instead of declaring it impossible, you should educate yourself instead of just being a denier.

Re:Good (0)

Anonymous Coward | about a year ago | (#44037735)

Even the 3 cents per $100 quickly adds up

That's the point. Investing in a company generally means buying some part of the operation, allowing the company to do its business, profit, and return some of those earnings to the investors. Think months-or-years. eg, when Warren Buffett buys a company, he keeps it forever.

If market profit relies on stepping between an investor and a business owner, shaving 1.5 cents/$100 off the price the owner receives and adding 1.5cents/$100 to the price the investor pays, and doing that for every transaction in the market, that's not really adding any liquidity or reducing spreads in any meaningful way. That's a speculator using technological advantage to collect a fee on transactions. This is bad behavior and should be discouraged.

Speculation does reduce spread, and short-term trading should not be banned. The question is: how much of a spread actually does have a meaningful impact on liquidity? A bid-ask of $99.99-100.01 will not "kill" all trading, at least not by people expecting to hold longer than 10 milliseconds, but $90-110 would certainly be chilling. Find a level of taxation that makes microsecond transactions unprofitable but still allows integral-second transaction to be profitable, and you won't have any impact on human-mediated transactions that require a second just for the current data to be processed.

Re:Good (1)

CrazyDoode (843836) | about a year ago | (#44037899)

HFT is the reason why I bailed out of forex. As a LFT (low frequency trader) i was smoked more often than not. Taxing the system in any form is not the answer as that would have LFT's and independent brokers taxed out of the market - HFTs won't care about any tax they'll just pass it along and write it off. Tra-la-la.

IMHO, the only way to fix this broken system is to significantly reduce the amount of trades a HFT can perform in a time frame such as 1 second or perhaps a minute. A harkin/defazio tax will only serve to further break an already broken system.

Re:Good (1)

clickclickdrone (964164) | about a year ago | (#44037325)

quality of *life*. Doh.

Re:Good (0)

Anonymous Coward | about a year ago | (#44037349)

says the peasant. keep pretending that there must be "a few" up there that actually care about long term.

Re:Good (0)

Anonymous Coward | about a year ago | (#44037411)

says the peasant. keep pretending that there must be "a few" up there that actually care about long term.

That's fine, as long as those "few" understand they will be the first ones eaten alive when the crash comes (that their greed caused).

Pork fat can't run fast, figuratively or literally.

Re:Good (1)

Le Marteau (206396) | about a year ago | (#44037573)

What crash? There will be no crash, just a steady devolving and regression. Every civilization has it's rise, glory and decline and fall, and we're witnessing the fall. As in the Roman fall, it will take generations. But happen it will.

We'll become more and more like Greece, which now has a 77% unemployment rate for those between 20 and 24 years old.

Where is the "Pork Fat" there? I tell you where it's not... it's not out whoring so they can eat that day.

If it makes your miserable life any more tolerable, keep hoping and dream "the man" gets what's coming to him.

He probably won't. You, however, being much more closer to the edge, most likely will.

Re:Good (5, Interesting)

gd2shoe (747932) | about a year ago | (#44037397)

HFT is a symptom of a deeply broken system. We need to really start to recognise that profit isn't all and long term stewardship of our instituitions and systems is key to our long term quality of live. For everyone.

Mostly true, but simplistic.

HFT is a symptom of a deeply broken system. It brings liquidity, which is good, but it has tended to move the market in unreasonable (and sometimes dangerous) ways. So many trades today are HFT versus HFT that it obscures the real markets. We've seen several clear instances where computers are terrible at predicting the real market values when the primary data they're competing against are the actions of other computers. HFT doesn't lead to good price discovery, it obscures it.

When talking about long-term stewardship of institutions, we really need to move away from unreasonable earnings expectations every quarter. When the focus of the market is on ever narrowing periods of time, corporations simply cannot properly invest in the future. Yes, some corporations are lead by unusual people who can leave market panic behind them and truly lead... but most companies are run by very smart idiots.

Ultimately, stock/commodity/bond markets are about profit. There is nothing inherently wrong with that. The question for the rest of us is: what is the social value? Wall Street has some social value, but it also has considerable social expense. Sometimes we forget that. We also tend to forget that "the markets" are still based upon similar principles that brought us the great depression. Yeah, they're more sophisticated now. Yes, there are "regulations" (occasionally enforced). But the market CANNOT bring prosperity by ignoring it, and letting it run on its own.

Stock/commodity/bond markets are not capitalism. They are merely outgrowths of one particular variation on capitalism. They're finicky, hard to properly balance, and break if you try to exert too much control.

Re:Good (5, Insightful)

peragrin (659227) | about a year ago | (#44037535)

Something like 60% of the active volume of trades are HFT that is lasting less than a second. That isn't investing in a company that is gambling.

The other problem is the economy is growing at maybe 1% a year and the entire stock market is doing 10-15% Sure some companies are growing that way but there is a major disconnect between how wall street is growing and the rest of the world. If Wall street is supposed to be about individual company profits how can it be growing so far beyond the companies that are represented in it?

Re:Good (1, Insightful)

locofungus (179280) | about a year ago | (#44037689)

60% being HFT doesn't sound unreasonable to me.

Given that market makers are, almost by definition, going to be doing HFT and there will be a market maker as counterparty to any investment trade, the "perfect" market would have 50% HFT matching buyers to sellers.

There is certainly an argument as to whether market makers are really required but, in practice, if they're not there, then I can't see how there can be any more trust in the stock markets than there is trading in ebay.

It's essential that when I buy I know that the stocks will be delivered and when I sell I know that I'll be paid. On ebay I factor in the fact that I might never get the goods into the price that I'm willing to pay.

Tim.

Re:Good (0)

Anonymous Coward | about a year ago | (#44037921)

A market maker is someone who is willing to buy and sell any product for a pretty good price. He makes money on his 'spread' the difference between his buy and sell price. It is important for him to be extremely quick because any kind of latency will put him at risk of having the wrong price at that time.

In most option markets (both stock and financial) there are only very few market makers, maybe one, two or three. A market maker is so important for market that exchanges offer them rebates on transaction costs as long as they maintain a tight market in one or several markets (less interesting markets are bundled with the more interesting markets by the exchange with such a deal).

If a market maker cannot be in the market it often means the buy and sell prices for 99% of the options are empty. Only a few orders for a few options remain. That means it becomes impossible for traders to trade directly a specific option they want to buy or sell. They will have to put up an order, set its price and wait for another interesting party to be their counter party.

Wall Street assholes (0)

Anonymous Coward | about a year ago | (#44037695)

Something like 60% of the active volume of trades are HFT that is lasting less than a second. That isn't investing in a company that is gambling.

The other problem is the economy is growing at maybe 1% a year and the entire stock market is doing 10-15% Sure some companies are growing that way but there is a major disconnect between how wall street is growing and the rest of the world. If Wall street is supposed to be about individual company profits how can it be growing so far beyond the companies that are represented in it?

The market is going up because of all the Fed money being printed.

The big Wall Street firms, hedge funds and private equity can borrow at the super cheap Fed rate and then they take that money and put it into the equity markets and the housing markets.

That's why all the talk on CNBC lately has been about when the Fed is going to "Taper".

That's got all those people shitting bricks.

Here's the sucky part - when the Fed does taper, all of those fuckers will be out (thanks HFT!) and we poor slobs will be left holding the bag with losses - again.

So, after we little people get screwed, those same mega rich folks will point fingers at us saying "You should have worked harder and saved more!"

I did that and you wiped my savings out you fucker! And it's gonna happen again.

Re:Good (0)

Anonymous Coward | about a year ago | (#44037699)

It isn't even gambling. It's a timing-attack on stock market servers.

Re:Good (1)

tburkhol (121842) | about a year ago | (#44037765)

The other problem is the economy is growing at maybe 1% a year and the entire stock market is doing 10-15%

This is balanced by the market sometimes declining by 20-30% in a year when the economy grows by only 0.5%. The stock market is more of a derivative on the actual economy. That's a complicated concept, though, and "too much" for the American public to deal with, so the popular press generally treats the DJIA or SP500 as though they are the economy. It's nice: a single number with a long history for comparison. You can always make some inane statement about whether it's better than last year and you can always make a straight-line projection to say where it might be next year.

Re:Good (1)

complete loony (663508) | about a year ago | (#44037869)

The movement of share prices correlates strongly (0.8 - 0.9) with either the velocity or the acceleration in the level of margin debt. Share prices are growing because people are borrowing money to buy them. This isn't "real" wealth creation, and it isn't sustainable.

Re:Good (1)

gatkinso (15975) | about a year ago | (#44037895)

HFT is many things.. gambling is not one of them.

Re:Good (4, Interesting)

Too Much Noise (755847) | about a year ago | (#44037681)

HFT is a symptom of a deeply broken system. It brings liquidity, which is good, but it has tended to move the market in unreasonable (and sometimes dangerous) ways.

That is a bit simplistic as well. First, stepping in front of a trade because you can (1) see it before the other guy (due to having lower latencies in talking to the exchange or having priority 'fast' data feeds) and (2) quote using fraction of a penny increments as opposed to pennies for the 'regular' guys is not adding liquidity. In fact, from the way flash crashes happen you can see exactly how HFT does not add liquidity with a stock/future going bidless and crashing. Properly supplying liquidity would not allow for something like that to happen.

When talking about long-term stewardship of institutions, we really need to move away from unreasonable earnings expectations every quarter.

Who is we? The short-termism here is the market speaking. The idea of markets setting the 'right' price is highly dependent on your definition of 'right'. As the saying goes, markets can remain irrational longer than one can remain solvent (and bet on rationality). Nevermind the fact that people in the market have different types of interests which are not always aligned to long-term value. See corporate raiders, LBO, and so on - case in point, Icahn.

When the focus of the market is on ever narrowing periods of time, corporations simply cannot properly invest in the future.

That's not entirely the problem. When the upper echelons of the corporations receive stock options with short vesting periods (no, 5 years is not long term compared to typical investment horizons, and 5 years are not really that frequent) the motivation to invest in the long-term future is basically absent. Also, there are industries where that is simply not possible, as the prevailing conditions fluctuate too much.

Ultimately, stock/commodity/bond markets are about profit. There is nothing inherently wrong with that. The question for the rest of us is: what is the social value?

Indeed, profit is the key word. Social value is incidental, if at all.

Re:Good (0)

Anonymous Coward | about a year ago | (#44037505)

"... profit isn't all and long term stewardship of our instituitions and systems is key to our long term quality of live. For everyone."
Yeah tell that to my golden plated bidet!

Re:Good (1)

camperdave (969942) | about a year ago | (#44037791)

Yeah tell that to my golden plated bidet!

I had ordered one of those, but I sold it before it before it was delivered. Made a cool $23.

Re:Good (1)

michelcolman (1208008) | about a year ago | (#44037923)

I then went on to sell it for another $10 more. Just a few more trades like that, and I'll have enough money to buy a gold plated bidet.

Re:Good (1)

stenvar (2789879) | about a year ago | (#44037701)

HFT is a symptom of a deeply broken system. We need to really start to recognise that profit isn't all and long term stewardship of our instituitions and systems is key to our long term quality of live. For everyone.

HFT is a problem because it interferes with free markets: you can't have people make rational buying decisions within a few microseconds. But your second sentence has nothing to do with HFT. If you want to advocate an economy based on "long term stewardship", do so without erroneously linking it to HFT.

Re:Good (0)

khallow (566160) | about a year ago | (#44037911)

HFT is a symptom of a deeply broken system.

Shouldn't you have to show first that there's something wrong before you spout bullshit about how broken the "system" is? Remember HFT means "High Frequency Trading". It doesn't mean whatever you think is wrong with the world or perhaps with finance today.

We need to really start to recognise that profit isn't all and long term stewardship of our instituitions and systems is key to our long term quality of live.

I think we ought to start by getting clueless people away from these institutions and systems. You can't have long term stewardship when idiots are meddling in things they don't understand.

As I see it, there should be a rule of "live and let live". If someone's system or institution isn't causing harm, then don't mess with them, even if they're rich.

It's also worth noting that the HFT gold rush is already ending. You better hurry or there won't be anything to complain about.

Does anyone day trade anymore? (1)

Anonymous Coward | about a year ago | (#44037335)

Serious question: Does anyone know any day-traders? Everyone I used to know who did this gave up because of the robots.

Re:Does anyone day trade anymore? (1)

Rockoon (1252108) | about a year ago | (#44037669)

Serious question: Does anyone know any day-traders? Everyone I used to know who did this gave up because of the robots.

I don't know anyone that makes buggy whips either....

Re:Does anyone day trade anymore? (1)

gatkinso (15975) | about a year ago | (#44037871)

From what I gather, it has basically been outsourced to China (seriously).

If the policy makers astually traded (5, Interesting)

ebonum (830686) | about a year ago | (#44037367)

They would know that people who execute a lot of trades get big discounts. HUGE discounts. If you are doing more than 20,000 or 100,000 trades a month, you start to trade at a fraction of the cost of a normal investor.
http://www.interactivebrokers.com/en/index.php?f=commission&p=futures3 [interactivebrokers.com]

With this fee structure, a HFT can get in and out and make money. A normal trader would lose money on the exact same trade. For the average guy, the trade might be profitable, but the trade commission is greater than the profit. Exchanges give a lot of incentives to traders who bring big volume.

I have a major issue with a system where two different traders make the exact same trade, but one loses money while the other makes a profit.
I'm not suggesting eliminating the lower fees for more active traders. I would like to see the gap between the highest commission and the lowest commission close. This simple change would work wonders to level the playing field. If the highest commission was limited to 130% of the lowest commission, the high frequency traders would lose most of their advantage.

Re:If the policy makers astually traded (0)

Anonymous Coward | about a year ago | (#44037403)

Well, the system you have an issue with would involve an utterly miniscule difference between the two. I am not sure that is worth getting majorly upset over.

Re:If the policy makers astually traded (0)

Anonymous Coward | about a year ago | (#44037435)

Do you also want government to limit how much cheaper WD can sell hard drives to google instead of you?

Re:If the policy makers actually traded (1)

PolygamousRanchKid (1290638) | about a year ago | (#44037479)

If the policy makers actually traded . . . they wouldn't be taxing it.

Re:If the policy makers actually traded (2)

Lumpy (12016) | about a year ago | (#44037635)

Policy makers do trade. They just trade on inside information and make 20%-50% gains on every trade. You are a peon so you have to rely on blind luck to get your .03% or on a good day 10%.

Look at the reports, trading exploding 2 seconds before things being announced, etc... All of congress trades, they just have very different information and rules than you do.

The profits have been competed away (4, Insightful)

Bruce66423 (1678196) | about a year ago | (#44037373)

As economic theory would predict, the money that was being made by HFT isn't any more because more and more people are getting to play the same game. The virtue of HFT is the liquidity that it brings to the markets, but at the cost of possible software caused chaos, as we've seen on a few occasions. On the whole it's probably worth tolerating, because the alternative is likely to see 'regulation arbitrage' as players go round any new rules.

Re:The profits have been competed away (3, Informative)

gd2shoe (747932) | about a year ago | (#44037429)

I believe we do need to address this somehow with regulations... but carefully. "Regulation arbitrage" is a very good term for the real complication here.

Re:The profits have been competed away (1)

wvmarle (1070040) | about a year ago | (#44037507)

A tax on every transaction would do the job. It doesn't have to be much, 0.01% or so will do - it eats away most if not all the profits made by HFT. And create a nice extra income for the government - must be welcome nowadays, especially as it's an easy sell of "taxing those evil bankers!"

Re:The profits have been competed away (2)

edgr (781723) | about a year ago | (#44037595)

Good luck with that. Traders will just move to more friendly jurisdictions. Most HFT is in deriviatives, which any exchange can list anywhere in the world. Liquidity will decrease in the taxed markets and the spreads will widen by the amount of the tax, hurting anyone who wants to invest there.

HFT doesn't help liquidity (1)

Anonymous Coward | about a year ago | (#44037619)

Traders don't help liquidity, they aren't buying a stock unless it can be resold, the liquidity is there already or the HFT guys can't HFT!

The spreads don't widen by the amount of the tax, we have these taxes in France and Italy. If anything spreads are tighter because the HFT guys aren't in that market picking off the middle ground.

Re:The profits have been competed away (3, Interesting)

wvmarle (1070040) | about a year ago | (#44037501)

Indeed HFT trades with HFT, there is no money in that. Or at least not much, as they all chase the same fractions of a cent.

The flash crashes as I understand are partly caused by all HFT systems using essentially the same algorithm, and as a result movements amplify really quickly. If there would be several radically different decision making algorithms in the market this shouldn't be much of a problem, as wrong decisions by one are taken advantage of by another, so the other can make a profit (directly punishing the bad decision of the one algorithm), and such market movements are smoothed out.

Re:The profits have been competed away (1)

Zorpheus (857617) | about a year ago | (#44037759)

Why would flash crashes be a wrong decision for HFTs? I think they could trigger many stop loss orders of other traders, and in that way buy stocks for low prices.

Good! (0)

Anonymous Coward | about a year ago | (#44037377)

May your HFT company burn in a fiery hell for all of the money it has stolen.

It's only natural. (5, Interesting)

Anonymous Coward | about a year ago | (#44037391)

If HFT is the latest shtick in "providing liquidity", then it really is arbitrage. And by its very nature, do enough of that and the opportunities exhaust themselves. In fact, the infrastructure built to support HFT improves access for other traders, too.

I think taxes may not be necessary, and probably would do more damage than good anyway. The big trouble with HFT isn't the trade volume, but the "probing" volume, offers made then withdrawn so quickly nobody can take'em.

I'm with the NANEX bunch on this; simply require that offers be good for a minimum timespan so that completely fake offers are unaffordable, for someone might take the offer. That saves the cost and administrative overhead of another senseless tax that hits far wider than the problem it purports to solve, but then doesn't.

Re:It's only natural. (1)

gd2shoe (747932) | about a year ago | (#44037439)

Mod parent up. It's not the only problem, or the only solution. But it does make sense, is fair, and doesn't harm legitimate market operations.

Re:It's only natural. (2, Funny)

Rockoon (1252108) | about a year ago | (#44037683)

Ditto - Mod the grandparent up.

The HFT's offer the best bids and asks (or else they wouldnt get any trades) -- there is nothing wrong with better prices for people looking to buy and sell -- really, there isn't -- it doesnt matter if some guy in the middle makes some money in the process - you are still getting a better price.

Notice how most of the people that hate HFT's dont even understand the difference between bids and asks, and that often even the rare few that do show at least this minimum level of understanding they often confuse the two and imagine that bids are higher than asks.

Re:It's only natural. (1)

Anonymous Coward | about a year ago | (#44037623)

None of it has anything to do with liquidity at all. That's just someone tossing around markety words they don't understand.

Of course HFT is arbitrage; arbitrage works by reallocating resources to where they're needed in the market. If you repeatedly buy low and sell high, the price of the low rises and the cost of the price of the high drops.

HFT is a victim of its own success. By moving resources to where they're needed, there are fewer arbitrage possibilities. Naturally, we have to keep trading to keep the market efficiently allocated, but that HFT is subject to diminishing marginal returns was something you could see from a mile away.

What's notable is that the value of performing HFT has dropped off without *any* government intervention. The market was completely self-regulating in this regard. It's been a tremendous boon to regular investors and regulators who have incredibly accurate stock prices to make decisions with, thanks to the traders. The traders got rich, so they're happy. Again, where is the terrible problem here?

Tax should be based on holding time (0)

Anonymous Coward | about a year ago | (#44037399)

HFT = 99,99% tax
long term investment = 0,01%

Re:Tax should be based on holding time (1)

camperdave (969942) | about a year ago | (#44037891)

How do you determine holding time? If I buy 3 this morning, sell 2, buy another 5 at noon, sell 11, buy 4, sell 2, buy 3, what have I held, and how long have I held it? Is it first in, last out, or first in, first out? Do I get a tax refund for the time I held a negative quantity?

It's not a simple problem, and the solution is not going to be simple either.

Front Running (5, Interesting)

ka9dgx (72702) | about a year ago | (#44037407)

The main reason for HFT is to "front run" the market, to game the traditional customers of the price discovery mechanism, and make a risk-less profit. This dis-incentivises the market for everyone else, who see it as corruption and move their money elsewhere.

The big picture though is one of a big liquidity event, in which the velocity of money [stlouisfed.org] is rapidly falling as everyone tries to save up enough cash to ride out the oncoming greater depression. The rapid printing of money is showing up in the 17% growth of the M3 Money Supply [nowandfutures.com] , but is getting hoarded up by banks and corporations as rapidly as it's getting created. This is the only thing keeping inflation from at bay, for now.

Once the Tsunami of dollars starts to find its way to main street, and chasing goods and services, an inflationary wave will hit us all, and we'll learn to get used to $10/gallon gasoline, and they start to remember it fondly not much later.

Re:Front Running (0)

Anonymous Coward | about a year ago | (#44037607)

Here fuel already is at $8.4 per gallon.
($10 is 7.47€, 1 US gallon is 3.8 liters, price of typical fuel (mostly tax) is 1.65€/liter in Finland.)

Re:Front Running (0)

Anonymous Coward | about a year ago | (#44037667)

The rapid printing of money is showing up in the 17% growth of the M3 Money Supply [nowandfutures.com], but is getting hoarded up by banks and corporations as rapidly as it's getting created.

It's also going into the equity markets and housing markets. The stock markets aren't going up because businesses are going better. They're going up because there isn't any other place to put the money. High yield equities have been taking off. for example, because you can make 3% or more buying Big Corp as opposed to The housing market is improving, not because John and Jane Public are buying, but because hedge funds and private equity are buying them up with all that cheap Fed money with the prospect of renting and speculation.

The money being "printed" by the Fed is doing very little for the average guy and it's just making the (super) rich even richer.

Oh noes (0)

Anonymous Coward | about a year ago | (#44037417)

"As the founder of HFT firm Tower Research Capital Mark Gorton puts it..." His name is THAT close to Gordon. He must be mighty annoyed.

Fix 'delayed prices' scam (5, Interesting)

Anonymous Coward | about a year ago | (#44037457)

The share tax in France and Italy doesn't affect us investors much. But if you're in to make a 30% return, you don't care about the 0.03%+0.03% buy and sell taxes anyway. It's only the traders, and they add nothing to the investment market, they're just skimming off some of the margin between buyer and seller.

IMHO, the biggest problem with the stock markets is delayed quotes. The big guys have the real time prices, the small guys have a fake price, from 20 minutes ago. This is a big problem with European stock exchanges. How can you have a market if you're lying to people about the current prices?!

That's what I'd like to see ended. The two tier price quote system.

The stock markets make us little investors deliberately ignorant of the true price, they then sell that ignorance as 'real-time-quotes- to the big guys. They should be forced to charge one fee to everyone for the same quotes, and stop deliberately deceiving investors into the market.

Re:Fix 'delayed prices' scam (4, Interesting)

ebno-10db (1459097) | about a year ago | (#44037941)

The share tax in France and Italy doesn't affect us investors much. But if you're in to make a 30% return, you don't care about the 0.03%+0.03% buy and sell taxes anyway. It's only the traders, and they add nothing to the investment market, they're just skimming off some of the margin between buyer and seller.

Thank you! I was going to to mention that the British tax doesn't seem to have killed the London Stock Exchange, but I wasn't aware that the tax also existed in France and Italy. As often happens in economic discussions (e.g. about health care) some people endlessly pontificate about what should happen according to their simplistic pet theory, and ignore the empirical evidence.

Level the playing field (1)

Anonymous Coward | about a year ago | (#44037483)

Beste way to kill off HFT and really level the playing field is to mandate a price per trade. The highest volume traders paying the same price per trade as the lowest volume traders would eliminate a significant portion of their advantage.

This way you don't get volume advantages - and only the HFTs that have a real competitive advantage due to strategy or technology will survive.

NSA Insider Trading (0)

Anonymous Coward | about a year ago | (#44037493)

NSA gets a raw internet tap, so presumably they must get lots of insider investment tips too *. I wonder how many analysts invest their stocks based on company emails? All that insider information, company reports sent to stock exchanges before being published, CEO's getting copies from the CFO before the annual report. The commercial data in there must be worth billions.

* NSA spokeswoman Judith Emmel, confirmed that *all* intercepted email data is filtered by machine, then trained analysts to categorize it as useful/worthless. So they're certainly reading it all, even if most is thrown away by a spam filter.

Re:NSA Insider Trading (0)

Anonymous Coward | about a year ago | (#44037671)

The NSA 'internet tap' in basically a insider trader / blackmail program...

Re:NSA Insider Trading (1)

gatkinso (15975) | about a year ago | (#44037885)

Where do you think many founders of HFT programs came from? Let's just say I know more than a few folks who commute regularly from Baltimore to New York.

"The easy money's gone" (0)

Anonymous Coward | about a year ago | (#44037739)

So much for "the rich work hard for their money".

HFT is organized theft (5, Insightful)

Required Snark (1702878) | about a year ago | (#44037741)

HFT divides the financial universe into insiders and outsiders. The resources required to compete are beyond the means of any but the most sophisticated and connected organizations. Any system that requires low millisecond access to the data stream is overtly biased towards the few. If you think you can participate by buying stock in companies that do this and share the profit you are showing gross stupidity. It's just like making hedge fund money; by definition, anyone below the top .1% is locked out.

Real world value does not change in millisecond increments, except for earthquakes and nuclear holocaust. Therefor the profit in HFT is extracted by decreasing value for non-HFC entities (that would be you). It's analogous to entropy.

The value extracted by the insiders disproportionately degrades the system for everyone else. It's equivalent to oil production in the Nigerian delta. The people who live there have a horribly destroyed environment, and people far away make huge profits.

HFT is vulnerable to mistakes and deliberate manipulation. Can you say Flash Crash? Remember, there is no real time way to tell the difference between a misbehaving algorithm and a deliberate market manipulation or a hostile attack. It's not even clear that you can differentiate after the event is over.

Anyone with a shred of self preservation should be scared shitless by this situation. For Wall Street HFT is a sacred institution, and any attempt to reign in the abuse is treated as an attempt to defile a holy site. They own the casino, and given the centrality of international banking institutions, everyone is forced to bet no matter what.

Wall Street types should be treated like meth freaks with rabies, because that's how they behave. They are actively dismantling the world economy for their own individual gain, and if they are not stopped there will be nothing left to save.

Oh please spare me (2)

gelfling (6534) | about a year ago | (#44037761)

First off, politicians who claim that everything that ever will be invented has been invented is worse than retarded. Second, they're just looking for tax money. That's it. It's just about the money. If they could tax talking about taxes they would.

More and More, Less and Less (-1)

Anonymous Coward | about a year ago | (#44037847)

"We're doing more things better than ever before and making less money doing it"

That's an interesting quote. In order to really understand what it means, you have to think about how the world economic system works.

Humans are capable of doing work and using that work to create things that other people want or need, perhaps to enable them to do some other kind of work.

In a fair system, I can do my work, create my product, and sell it to you so that you can do your work, and create your product, and the value of the wealth you exchange to me could possibly be greater than the sum of the wealth I invested in making that product for you. So, in other words, I have increased my wealth by doing work, and that is the incentive for me to continue.

There are ALWAYS going to be some humans who are willing to work more than others, and accumulate more wealth than others. There are ALWAYS going to be some humans who come up with better ideas and better products that carry higher value in this system than others. It's a fact of life, but it is FAIR that these humans are able to realize that additional value, because it is worth more.

Of course, humans are also creatures of irrational emotion, and those whose ideas, products, and therefore work is worth less, will often become jealous of those whose ideas and products, and therefore work is worth more.

If we accept the premise that the value of work of a particular person follows a gaussian distribution, we will have a small percentage of people coming up with extremely high value work, the majority of people having about average value in their work, and another small percentage unable to provide much value in their work.

There is also some level of value for ones work (call it income from here on out) where life becomes "easier." This value is defined as that which is sufficient to provide for the basic necessities of life, with a little extra value to spare that can provide for these necessities should one become unable to earn income for a period of time, and perhaps even to accumulate unnecessary items. This level of income moves around on the income distribution based on many economic variables, but in general let's say it generally hovers within one standard deviation of the mean.

If economic pressures begin to move that level upward, more and more people suddenly find it's "not easy" anymore, and because people are irrational, emotional creatures, they tend to look outward, not inward, for the cause of their difficulties. This trait is invariably exploited to create a sort of class envy among those below this line, directed at those above it.

If this line rests above the mean, then you have a majority of people who are sitting in blame of the minority for their problems. This is where the concept of "government" comes into play - not to be confused with "governance," which is completely different.

"Government" is an establishment created by the class below the line for the purpose of punishing the class above it, because after all due to humans' incapability of accepting responsibility for themselves, and looking inward for ways to solve their problems, the inferior majority will always blame the superior minority for their problems, and use Government as a means to "right" the "wrongs" that have been perpetrated against them, at least in their minds.

So, Government beings "punishing" those who do the most valuable work by stealing the value of their labor and giving it to those who are members of the governing class. They know that the value-producing minority will seek to overcome this obstacle by working harder and producing more, even if they have to give ever growing pieces of that value to the "victim" class.

The harder they work, the more value flows to the victim class, and the less work they have to do to create their own value. The productivity of the "producing" class increases dramatically, but the value they realize from it gets smaller and smaller. And, overall productivity of the society may continue to rise, but as it does, more and more victims cease producing, opting instead for the "easy" route of just taking more from the producers.

The victim class that controls Government may even create the illusion of economic growth by inflating the money supply, driving up the dollar value of the producers' work, but at the same time diminishing the real value of it. This is called an inflationary monetary policy, and is used to create the illusion of growth where none exists.

So, more and more is produced by the producers, but it is worth less and less to them, and to everyone else, due to inflationary policy.

Indeed if you compare the USA to this prototype, upon inspection you will see that GDP adjusted for inflation has not risen one bit since the New Deal. We are not producing any more per person than we were back in the 1950s, but people are working more and more hours, working two jobs per household instead of one, and having fewer and fewer children because that imaginary "easy" line keeps moving farther and farther out of reach as the victim class drives down production more and more, grows its own burden on the producers, and discourages success.

The New Deal created this "victim" class, and set it against the producers. Fast forward to today, and way more than 50% of the population is part of this victim class. Looking at the litmus test defined by the total amount of government spending divided by the number of households, less than 20% of all households pay sufficient income tax to cover what the government spends on them.

In 2011 there were 114.8 million households in the us, and the Government spent approximately 3.6 Trillion dollars. That's a per-household expenditure of about $31,400 per household. If a household does not pay at least this much in income tax for a given year, they are part of the victim class that takes from the producers to make up for the shortfall of their contribution. More than 80% of households do not pay this much in income tax (2011 IRS statistics).

Tulip Bulbs (1)

ThatsNotPudding (1045640) | about a year ago | (#44037877)

Tulip bulbs traded at the speed of light.

tax ok but I'd rather have synchronous trading (0)

Anonymous Coward | about a year ago | (#44037917)

this tax solution is ok, but it just gives the government revenue for no good reason. I'd rather use a system where all trades have a minimum time slice that is synchronous, so if you try to trade at sub intervals it will not complete the trade until the end of the interval.
I would further propose that this interval be something large like 5-10 seconds. This would cause everyone to calm the heck down.
And it would have the nice side effect of simplifying matching up trades without a market maker.
I am not aware of any downside to it, but I welcome criticism.

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