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Australia May 'Pause' Trades To Tackle High-Frequency Trading

samzenpus posted about 4 months ago | from the slow-it-down dept.

Australia 342

angry tapir (1463043) writes "The Australian Securities and Investment Commission (ASIC), a government financial watchdog, is reportedly contemplating the idea of implementing a 500 millisecond delay on trades in an effort to put the brakes on high-frequency trading. ASIC last year knocked back the idea and stated that fears about HFT were overblown. However, in a government inquiry today representatives of the organization said the idea of a 'pause' is still on the table."

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342 comments

Won't work (5, Interesting)

EmagGeek (574360) | about 4 months ago | (#46682937)

If you simply change everyone's temporal frame of reference by the exact same amount, you have done nothing, really. Everyone will simply account for the 500ms delay, and trades will still execute in the same order.

Re:Won't work (5, Interesting)

captainpanic (1173915) | about 4 months ago | (#46683141)

The way I understand it is that traders (computers) have to hold on to shares for a minimum of 500 ms, which means that whatever the market does in those milliseconds cannot be acted upon. However, others can act in the meantime.

Personally, I think that it should be law that if you buy shares in any company (or fund or whatever), you have to hold on to them for a minimum of a week or a month. Shares represent actual physical companies which own factories and employ real people. Those things don't change in 500 ms. They change over a much larger amount of time. And I believe that the stock market would be healthier if this was reflected in its trading. Obviously, when new information comes out (press release: "The factory of company X has just gone up in flames"), everybody's counter should be set to zero, but shares sold in such a case cannot be bought back a fraction of a second later (because whoever just bought them has to hold on to them for a week/month).

I don't pretend that this plan is waterproof. I'm sure someone will shoot a big hole in it in the replies below... I just wish that the stock market would represent what it's supposed to represent: a place where people can invest in our real economy.

Re:Won't work (4, Insightful)

operagost (62405) | about 4 months ago | (#46683207)

Obviously, when new information comes out (press release: "The factory of company X has just gone up in flames"), everybody's counter should be set to zero

This is enough to show why your idea won't work... unless you plan is really to collapse the economy. What information is major enough to allow immediate sales of stock, and who gets to choose?

Re:Won't work (1)

captainpanic (1173915) | about 4 months ago | (#46683461)

There's basically 3 types of information for traders:
1. Official public information from the company itself (press releases, annual report, etc).
2. Analysis by external parties
3. Unofficial (non-public) information from within the company - trading using this is called insider trading, and this is already against the law.

So, when companies release information (category 1), everybody can trade. I do realize now that large companies have press releases on a daily basis. So, maybe the timespan of a week/month was a little long. But at least something that reflects the timespan between press releases (hours? at least not milliseconds) would still be a good idea.

Re:Won't work (0)

Anonymous Coward | about 4 months ago | (#46683881)

It would not be practical to use your metrics for resetting trade restrictions as there is no system in place for notifying the exchange of every official statement made by a company (as an example running a new TV commercial, or updating their web sight or Facebook page would qualify).

It won't work.. second entity can short (1)

mrops (927562) | about 4 months ago | (#46683765)

Even the 500ms won't work. HFT have a lot of infrastructure and resources. You can simple model your HFT in a way that there are two entities trading, one buys it, if the HFT system decides to sell it and is restricted to do so for 500ms or a week, the other entity shorts the same trade, in effect achieving the same results. IMO, you should be allowed to short trades along with this 500ms block for this to properly work.

Obviously, you can have multiple entities trading on behalf of the HF Traders.

Re:Won't work (4, Funny)

OzPeter (195038) | about 4 months ago | (#46683235)

I just wish that the stock market would represent what it's supposed to represent: a place where people can invest in our real economy.

I purpose the the stock market should really go back to its roots, and that every share should be attached to a genuine item of stock - be that cow, pig or chicken. And that you are responsible for housing and feeding all the stock that you own.

This would also have the interesting effect of changing our perception of Bull and Bear markets.

Yikes (1, Insightful)

Primate Pete (2773471) | about 4 months ago | (#46683347)

A week?! A month?!!

How do you propose to compensate me and others for the loss of value and liquidity created by your arbitrary market rules and centrally controlled economy? Will you or the government either put up part of the purchase price to compensate for your partial control, or allow me to write off losses caused by the proposed rules?

What's wrong with me immediately changing my mind after a trade?

You realize a market is already... (0)

Anonymous Coward | about 4 months ago | (#46683421)

'centrally controlled', don't you? Be it by the market owners, or whatever your local equivalent of the SEC is, the market is already stacked for the paper pushers to win steady, and everybody else to claw over each other for their share of the scraps.

Re:Yikes (4, Insightful)

lorinc (2470890) | about 4 months ago | (#46683579)

Stop the bullshit. You're not changing your mind, you're trying to gain a lot very quickly by gambling.

If you don't understand the implications of what you're doing, please go to the casino instead of messing up our global economy.

Re:Yikes (3, Informative)

ysth (1368415) | about 4 months ago | (#46683605)

The concept is that the market is supposed to be for investing. Investing implies certain loss of liquidity (no idea what you mean by loss of value). That said, see my response.

Re:Won't work (1)

frinsore (153020) | about 4 months ago | (#46683373)

The problem with requiring someone to hold onto shares for a specific amount of time is that it doesn't prevent HFT but instead adds a barrier to entry. If I buy 5 shares of IBM but then must wait a week before I can sell those 5 shares what prevents me from selling these other 5 shares I bought last week? If there was a company that held several stocks that were readily trade able other people could contract selling the shares & replacing them for a nominal fee. This would be similar to shorting stocks.

One possible solution would be to trade shares on a fixed schedule, ex: every minute but not between minutes. This would provide everyone the same amount of time to react to the information. The difficult part would be deciding between who wins the bids, since time is an unfair determining factor that leaves some other metric like price bid or bidder's history or a random element.

Re:Won't work (5, Insightful)

KingOfBLASH (620432) | about 4 months ago | (#46683379)

Well let's say you want to buy a share, who do you buy it from? Or let's say you want to sell a share, who do you sell it to?

It used to be you'd actually have to find someone to step in and take the contra side of your transaction. That's a pain in the ass, will cost you time and money, and in the event you need to sell and everyone else wants to sell you're screwed. All of this would mean that unless you had lots of money to invest, the stock market was not for you.

Fast forward to today. We have people willing to take a position, any position. They provide "liquidity" for the market by buying the share you wanted to sell, in the hopes that they can turn around and sell it for a fraction of a cent more when someone comes along with a buy order. They actively manage their inventory of shares (yes that's a thing), and adjust prices in the event information comes out causing a large price change in the shares.

This is a service that needs to continue if you want modern markets to maintain their efficiency.

Now here's the problem. Back when the "marketmakers" were actual human beings buying and yelling at each other in trading pits one would not be substantially faster than another. But, using computers, there's an arms race for speed. If you can get a few miliseconds (or even nanoseconds) faster than your competition, you can take all of the profitable orders. This means if you plough enough money into speed, you can just own the market. In addition, because computers are so fast, your computer can make many millions of silly trades before a human trader can push the big red stop button.

Now a solution needs to come about. But, because of the need for market makers speed can't really be limited to holding onto shares for months. (Sorry). 500 ms basically breaks the arms race since it's a very easy speed to obtain. So, you can't just plough money into being the fastest kid on the block.

Re:Won't work (1)

Immerman (2627577) | about 4 months ago | (#46683409)

I agree this would seem like a good solution. Perhaps lowering the limit to a day or an hour though to keep things fluid. As long as the time period is considerably longer than the communication delays you've removed a lot of the ways in which HFT can game the system. A short enough time period would also pretty much remove any major advantages to "resetting the clock" - Yeah, it sucks if you bought stock in a company ten minutes before the factory catches fire, and will have to wait for another 50m before you can sell, but there's always a certain amount of unavoidable risk in the market - I doubt increasing it by such a small margin will have a huge effect.

Re:Won't work (1)

heypete (60671) | about 4 months ago | (#46683479)

Personally, I think that it should be law that if you buy shares in any company (or fund or whatever), you have to hold on to them for a minimum of a week or a month. Shares represent actual physical companies which own factories and employ real people. Those things don't change in 500 ms. They change over a much larger amount of time. And I believe that the stock market would be healthier if this was reflected in its trading. Obviously, when new information comes out (press release: "The factory of company X has just gone up in flames"), everybody's counter should be set to zero, but shares sold in such a case cannot be bought back a fraction of a second later (because whoever just bought them has to hold on to them for a week/month).

A week or a month might be a bit too long, but something along the order of 1-5 minutes might be reasonable.

Alternatively, one might also have the exchange do batch orders: traders submit their orders to the exchange, the exchange groups them all together, and then processes them all periodically (say, every 30 seconds or something), then displays the results. Since the results are not released until after the batch is fully processed there's no advantage to submitting an order at 29.999 seconds compared to any other time within that window. This way trades can be executed reasonably quickly on a human scale and HFT doesn't have any particular advantage.

Re:Won't work (4, Insightful)

ysth (1368415) | about 4 months ago | (#46683581)

There's no need to set a minimum time; what is needed is a minimum tax or fee. It could be .01% and still completely put a stop to abusive trading.

Re:Won't work (1)

Anonymous Coward | about 4 months ago | (#46683683)

The 500 ms delay will NOT solve the problem. I will by 100 shares every millisecond and keep it for 500 ms and sell it. So I will always have 50000 shares at any moment. This way I will not gain or loose money since at every ms I am buying and selling 100 shares at (almost) the same price. If I really want to "trade" in the old sense, then I just delay the selling or buying of those 100 shares, and I am in business.

Re:Won't work (4, Interesting)

Gr8Apes (679165) | about 4 months ago | (#46683721)

It would be better to have random delays introduced from 0-30s, which causes out of order sequencing on trades, making HFT relatively unreliable and unusable, since the high speed links currently used to facilitate those ms advantages will be entirely negated.

Re:Won't work (1)

Anonymous Coward | about 4 months ago | (#46683157)

The problem isn't the order per se, it's disparate knowledge. High frequency traders can "jump the queue" because they can react faster to the same information. The point of a delay isn't to disable their execution advantage, it's to disable their knowledge advantage. When you can't get an order in faster than 500ms, you can not know the market movement in the 500ms before the order is in. They can still jump the queue, but they would have to do so "blindly", which prevents most of the shenanigans that HFT is used for.

Re:Won't work (5, Insightful)

JoeyRox (2711699) | about 4 months ago | (#46683221)

It will work. The majority of HFT's illicit profits accrue from speed arbitrage *between* the exchanges, not from a speed advantage at any particular exchange. A co-located HFT server at an exchange sees an order, and, in anticipation of that order representing a larger order that can't be filled in full at that same inside "best" price at that exchange, trades ahead of the order by sending a buy/sell order to other exchanges faster than the original buyer/seller can, resulting in a riskless vig for the HFT trader. By delaying orders on all exchanges by 500ms, the benefit of early-access to incoming orders on any particular exchange is eliminated because all the exchanges will have 500ms of order price discovery incorporated into their SIP, the consolidated price representing the aggregate of the best prices for all the exchanges.

Re:Won't work (5, Informative)

L4t3r4lu5 (1216702) | about 4 months ago | (#46683617)

It's front-running by machine. If a person-trader did this, they'd be in jail.

"... the illegal practice of a stockbroker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers."

Re:Won't work (4, Interesting)

gurps_npc (621217) | about 4 months ago | (#46683273)

Incorrect. One of the major issues is that HFT look at multiple markets. They see a trade go down in market a, than instantly - in less than 100 ms, change their own order in market b.

By putting in a delay of 500 ms, you prevent this kind of behavior.

Why is that behavior bad? Because for high volume traders they have to split a single order over multiple markets - mainly because others are ALSO splitting among multiple markets.

That is, say I have 500,000 shares to sell. Currently 5 different markets all show a price of 35.2, at 100,000 shares being offered

Moreover, all 5 markets offers are from you, as you are the main guy buying right now.

It is NOT fair for you to take 100,000 of my order at 35.2, then instantly cancel your four other 100,000 orders and replace them at 35.4

You offered to buy all 500,000 at 35.2, not just that 100,000 and should not be allowed to cheat me by raising your price for the remaining 400,000.

A delay of 500 ms means you can't see that your first order is executed until after all your other orders are ALSO executed.

This is one simple example of how HFT try to unethically game the system.

Re:Won't work (0)

Anonymous Coward | about 4 months ago | (#46683873)

If you simply change everyone's temporal frame of reference by the exact same amount, you have done nothing, really. Everyone will simply account for the 500ms delay, and trades will still execute in the same order.

Then you have no idea how HFT works.

500 ms (1)

rossdee (243626) | about 4 months ago | (#46682945)

Thats half a second in laymans terms

If you need to sell some stock or commodity within a second of buying it, then something is wrong

Re:500 ms (2)

StripedCow (776465) | about 4 months ago | (#46683097)

True.

However, I still think it is wiser to slowly increase the delay from 0ms to 500ms over several months, because that would prevent any shock waves going through the markets.

Re:500 ms (1)

thaylin (555395) | about 4 months ago | (#46683189)

Why? if there is nothing wrong with HFT then why would there be shock waves?

Re:500 ms (1)

Immerman (2627577) | about 4 months ago | (#46683457)

If there's nothing wrong with HFT then this would be a pointless change. I have to agree that a slow increase might be wise - we've already established that the majority of trading by volume is by HFT algorithms, which by their nature are incapable of exercising common sense, and have in fact caused massive swings in the market simply through their emergent reactions to random noise and each other.

Re:500 ms (0)

Anonymous Coward | about 4 months ago | (#46683251)

I've thought of three ways to address this:

1: A small cost per transaction. That way, the HFT traders can do their trades... but with even a tiny tax per transaction, it will slow this down.

2: A random delay on each transaction of 0-100 milliseconds on top of the 500ms delay. Cryptographically random and done in a way that is fair to all. The delay will not make the playing field perfectly even, but it will give the guys who don't have the billions in server farms a chance at some success.

3: In US prisons, prisoners can only move between cells from the start of the hour to the tenth minute (i.e. from 2:00 to 2:10.) A similar concept should be in trading, where trades can only be executed at certain time intervals, such as the first part of each minute or allowed for five seconds, disallowed for five, etc.

Even a random delay on transactions of 0-25 milliseconds will make things fair... of course, unless the RNG is checked out to be fair, that can be gamed to a player's advantage very easily.

Re:500 ms (1)

rvw (755107) | about 4 months ago | (#46683149)

Thats half a second in laymans terms

If you need to sell some stock or commodity within a second of buying it, then something is wrong

They need a 20 minute sell ban, plus a 1ct price tag for each buy.

How does this simply not move the goalposts? (3, Insightful)

Junta (36770) | about 4 months ago | (#46682949)

If the whole point is to be x microseconds ahead of the other guys wouldn't a 500 ms delay simply mean the exact same game would become 'after 500 ms, still be a few microseconds ahead of the other guys'.

I would imagine a more effective approach would be to process trades 4 times per second. A request for a trade always gets processed in the slot after the next slot (meaning no less than a 250 ms delay, but no more than 500 ms delay). Within a given slot of trading activity, randomly shuffle the requests so that someone beating someone else by less than 250 ms doesn't actually affect things.

Re:How does this simply not move the goalposts? (0)

Anonymous Coward | about 4 months ago | (#46683007)

If the whole point is to be x microseconds ahead of the other guys wouldn't a 500 ms delay simply mean the exact same game would become 'after 500 ms, still be a few microseconds ahead of the other guys'.

I would imagine a more effective approach would be to process trades 4 times per second. A request for a trade always gets processed in the slot after the next slot (meaning no less than a 250 ms delay, but no more than 500 ms delay). Within a given slot of trading activity, randomly shuffle the requests so that someone beating someone else by less than 250 ms doesn't actually affect things.

HFT is making money off of network noise.

Re:How does this simply not move the goalposts? (2)

Impy the Impiuos Imp (442658) | about 4 months ago | (#46683589)

Before outlawing it in a pique of jealousy at some perceived cosmic injustice, is this kind of trafing actually a problem?

If the real danger is a scenario where computers issues millions of trades in a few seconds in some feedback loop watching each other and making predictions, a 500ms slowdown could be just what the doctor ordered, slowing things down by 3-4 orders of magniude.

Re:How does this simply not move the goalposts? (2)

homb (82455) | about 4 months ago | (#46683015)

One of the major problem is when an HFT sees your making a trade in exchange A, it assumes you're going to be hitting the other exchanges for similar trades and beats you to them. I don't see how putting a delay in a trade at a single exchange would help.

Re:How does this simply not move the goalposts? (1)

Junta (36770) | about 4 months ago | (#46683103)

Well my thought would be that multiple exchanges would implement the same scheme. In that case, someone coming in as late as 249 milliseconds after you has a 50/50 shot of being ahead of your trade anyway. Yes, one exchange wouldn't be enough, but the more exchanges that did the scheme, the less this would help.

Re:How does this simply not move the goalposts? (2)

StripedCow (776465) | about 4 months ago | (#46683115)

How about: incoming trades are delayed by a random amount of time (within reasonable limits).

Re:How does this simply not move the goalposts? (1)

DarkOx (621550) | about 4 months ago | (#46683123)

This solution does more or less solve that problem as well. Nobody but the exchange will have a view of the orders for at least a 250ms but possibly as long as a half second under the parents scheme. That will anyone selling or buying in enough volume to be a market mover on anything but the smallest of micro caps likely has the technology to submit orders to each exchange they mean to trade on inside that window where the HFT guys will not have the opportunity to do any new price discovery.

That should effectively thwart the front running ( if its really happening on the scales many claim ). It will help the retail level investor who owns funds, that may have been themselves victims of front running. It will also minimally impact the operation of the market and price discovery behaviors for not HFT trading. This may help prevent a flash crash type situation as well because the HFT machines will have to wait to see if an exchange is really dropping before the open up their sales and short sales on other exchanges. I think its a good solution in those terms; but I remain unconvinced that HFT is really the problem many say it is; the evidence just isn't there.

Re:How does this simply not move the goalposts? (3, Insightful)

Junta (36770) | about 4 months ago | (#46683167)

In this case, the question is 'what's the downside?' If HFT isn't really a problem, then what harm would it be to level the playing field to 250 ms or whatever quantums? If HFT is a big deal, then this would fix it. If it is not, then it wouldn't change things much.

Certainly some financial institutions are heavily investing in HFT relevant schemes, so they at least believe that HFT impact can be significant.

Re:How does this simply not move the goalposts? (1)

Githaron (2462596) | about 4 months ago | (#46683093)

They could also use cooldowns rather than a delays. HFTs will then put themselves at a disadvantage if they are constantly making trades because they will have to wait the whole cooldown before they can react. Meanwhile, everyone else will have no delay since their last trade was long before (at scale).

Re:How does this simply not move the goalposts? (1)

StripedCow (776465) | about 4 months ago | (#46683215)

This could be more difficult to implement, because you'd need to keep track of all the trades.

Re:How does this simply not move the goalposts? (1)

GameboyRMH (1153867) | about 4 months ago | (#46683411)

Agree, if it's a *delay* it does nothing. If it's an *interval* it would help. And I think a 5sec interval would be good. That would eliminate all technological competition, putting the servers in the exchange basements with hot-swappable, consumable CPUs and bleeding-edge network gear on par with a RasPi on the other side of the planet.

Re:How does this simply not move the goalposts? (1)

Pro923 (1447307) | about 4 months ago | (#46683487)

i agree with this 100%. Even make it a minute, for example... So trades only execute every minute on the minute - everything just buffers up until that second hand reaches zero again. I can't see any negative to this, and it would certainly seem to eliminate the shenanigans of using connection latencies to skim off of the inefficiencies of the market.

Re:How does this simply not move the goalposts? (1)

KingOfBLASH (620432) | about 4 months ago | (#46683497)

Won't work. How do you suppose trades actually go through and prices get discovered? Trading and price discovery sort of works like an auction. An auction is not effective if you randomly scramble the order the bids come in.

I say like an auction because there's not actually an auctioneer, it's more complicated than that. Some people do what's called passive execution. They put a quote out there that says "I'll buy XYZ at $x and sell at $y." Other people do what's called aggressive execution. They see your order to buy for $x and they "hit" it, and take the other side of the order.

Algorithms ultimately move the price they're willing to buy or sell at up or down, which is what creates price discovery. So if I'm willing to buy at a higher price than you, my quotes will get "hit" and you'll either need to match my offer price, or stay out.

That's where the speed advantage comes in. If I publish a quote to say I'll buy at $x + $0.05, and it takes my competitors 500 ms to react, and you can react in 100ms, you can buy shares from my competitors and sell to me before the market stabilizes.

That's the point of the delay. Right now there's a speed arms race where the fastest trader basically takes all the chips. If you can react to price discovery in 100ms, and it takes me 500ms, I effectively can't trade anymore.

Only delay sell orders? (1)

crow (16139) | about 4 months ago | (#46682979)

I was first thinking that there should be a minimum holding period of five seconds, but I'm not sure that's technically feasible. How about only delaying sell orders? That would effectively create a minimum holding period.

Why not just a small transaction fee? (2)

Wycliffe (116160) | about 4 months ago | (#46683101)

This might work or just have the delay a random amount between 1 and 5 seconds but I
think the better solution would be to just increase the transaction cost as presumably this
is putting a fair amount of load on the system as well.
A simple transaction cost of maybe 1cent per share wouldn't affect a normal buyer at all,
would bring in money to the exchange but would put a huge damper on buying and selling
thousands of shares per second.
High Frequency Trading is kindof like email spam. The only do it because it is profitable.
A transaction cost should make it unprofitable unless they are scalping. If they are
scalping then the best solution is to maybe both increase the transaction cost and
add a random delay of 1-5 seconds. The increased transaction cost could also help
offset any loss that might come from the reduced volume of trading as presumably they
already do get a little something per transaction.

Re:Why not just a small transaction fee? (1)

Immerman (2627577) | about 4 months ago | (#46683541)

Well, it would at least put a damper on HFT schemes where the profit is less than 1 cent. How common is that though? A HFT jumping in the middle of a 5-cent transaction discrepency still stands to make 4 cents.

Re:Why not just a small transaction fee? (1)

L4t3r4lu5 (1216702) | about 4 months ago | (#46683671)

1 - 5 cents is the bread and butter of HFT. The fact that it's only
The trouble is that it's actually billions of dollars annually because it's on every transaction.

Re:Why not just a small transaction fee? (2)

L4t3r4lu5 (1216702) | about 4 months ago | (#46683699)

Ah fuck me not closing my tags properly.

1 - 5 cents is the bread and butter of HFT. The fact that it's only < 10 cents that nobody thinks it's that big a deal.

The trouble is that it's actually billions of dollars annually because it's on every transaction.

Re:Only delay sell orders? (0)

Anonymous Coward | about 4 months ago | (#46683469)

If only sell ordered were delayed, one would only have to short sale a stock and immediately buy it back. This does not guaranty a minimum holding period.

Or a tax. (2, Insightful)

Anonymous Coward | about 4 months ago | (#46682993)

A pause just creates an arms race. Taxation is a good antidote to accumulation of money without creation of wealth.

And don't give me any of the liquidity bullshit - investment, to be rational, must be a long term exercise. And there's no reason why market makers can't charge less without the HF bullshit - hell, public or private sectors could create a non-profit market maker.

Re:Or a tax. (2)

Whammy666 (589169) | about 4 months ago | (#46683051)

I'd support a transaction tax so long as the funds were used for better enforcement and prosecution of Wall Street crooks.

Re:Or a tax. (3, Insightful)

jythie (914043) | about 4 months ago | (#46683655)

Or an even simpler solution, extend the laws that make a human doing this illegal to cover automated systems too. HFT is only 'legal' because they can scream 'but it is being done by technology!', but as various court cases with file sharing have shown, assuming the judge feels like it, novel technological implementations are not a panacea against legal repercussions. Unless of course you have good lawyers, weak regulation, and an industry that is profiting from the transgression, in which case a judge might indeed magically find that the technicality is enough to get them off.

If you really want to shake things up (1)

StatureOfLiberty (1333335) | about 4 months ago | (#46682997)

Just make a rule that you cannot own shares less than some arbitrary time. Say 10 minutes or maybe an hour.

Better article (5, Informative)

homb (82455) | about 4 months ago | (#46683003)

There's a gripping article over at the NY Times (adapted from a just released book) that explains very well the pitfalls of HFT, where the problems are mostly due to the haves and have-nots, just like in most things. The article is at http://www.nytimes.com/2014/04... [nytimes.com]

Not having a level playing deck in an exchange is a major problem for the correct functioning of said exchange.

Re:Better article (0)

Anonymous Coward | about 4 months ago | (#46683531)

haves? have-nots? did you per chance write the article about the "windows xp black market"?

Re:Better article (1)

jythie (914043) | about 4 months ago | (#46683701)

yeah, but the exchanges can really profit from inertia here. They only have to be fair enough for investors to not leave for exchanges with less usage on them. Kinda like PayPal, no one likes them, sellers and buyers know the company is corrupt, but it is where the buyers and sellers are so if you want access to other people using it you have to use it to. PayPal profits off this as long as they keep their corruption low enough to not cause a mass exodus. Same with the exchanges, investors know they are corrupt, but that is where the other investors are, so as long as they do not get TOO corrupt, investors will use them. People have tried building alternative exchanges that avoid the various conflicts of interest, but not enough people are using them for people to, well, use them.

Article is not very clear. (3, Informative)

140Mandak262Jamuna (970587) | about 4 months ago | (#46683013)

The Australian Financial Review today reported that ASIC had told the inquiry into Australia's financial system chaired by David Murray the regulator would consider introducing a half-second clamp on trades to remove HFT's speed advantage.

HFT work by seeing the order in one exchange at one price, and the same thing is available in another exchange for a slightly different price, simultaneously buy in one, sell in another and pocket the difference. Plain arbitrage, something Commander Vanderbuilt apparently did back in the days when news traveled on horseback during the day time. And he traveled at night in his sailing ship and raced ahead of the news, dumping bonds from bankrupt New York corporations.

These exchanges communicate the prices between themselves and take slightly longer than 350 milliseconds for the news to travel between exchanges. These big trading companies have faster access to both exchanges and are able to act on them. Would it be enough to delay all orders by 0.5 sec? Even if one trading firm sees the price difference, before it could act on it, the news would have traveled and it could no play micro second arbitrage.

This is my understanding. It might mean any trader must hold the instruments for 0.5 sec before trading it again. Not really sure what the article means by clamp.

Re:Article is not very clear. (1)

rvw (755107) | about 4 months ago | (#46683195)

Make it 20 minutes so people can understand what's going on. A sell ban for 20 minutes. And preferably a 1ct tax for each buy.

Re:Article is not very clear. (2)

locofungus (179280) | about 4 months ago | (#46683277)

Not really. That used to be possible but there are now so many people doing it that there aren't sufficient arbitrage opportunities to make enough money to cover your costs.

Instead it's more like this:

Consider a hypothetical stock that is worth exactly $1.

What used to happen was that the market makers would have a bid/ask of 0.95/1.05. (For a modern market that still trades with those sorts of spreads, look at gold metal. For small investors, a 5-10% bid/ask spread is fairly typical)

Someone came along and said, hey, I can make money even if I under cut the banks on both sides. So they started offering 0.96/1.04, another competitor, 0.97/1.03 until eventually you end up at 1.00/1.01.

Of course, in real life it's not quite that simple, the price actually moves. While the banks were offering 0.95/1.05, excepting exceptional circumstances, they don't need to update their prices all that often in order to avoid losing money. Of course, they do want to update their prices but it's a fairly leisurely process.

HFT traders can keep their spreads so low because they update their bid/ask prices constantly.

They make money, not by having a big margin, but by having tiny margins but capturing a lot of trade by having the best price. HFT has taken money from the banks and given it back to the investor.. The banks hate it and would love to see it stopped.

That said, there are things that (some) HFT firms are allegedly doing that aren't ideal. One of the things is to enter a new bid/ask into the order book and then cancel it again so quickly that nobody else can take advantage of it.

For example, current market 0.99/1.01. HFT puts in a 1.00 bid and then instantly cancels it again. People see that 1.00 order and try to move towards it - for example the person with the 1.01 ask might cancel it and enter a 1.00 ask instead to try and match the 1.00 only to find it's been cancelled in the 50us it took to react to it. The 1.00 ask now gets cancelled again but the HFT has now entered a 1.01 ask and is now front of the order book.

I have no idea how prevalent this is but if it is, it's easily preventable (orders have to be good in the market for a minimum (short) length of time before they can be cancelled) without having to lose all that is good in HFT.

Re:Article is not very clear. (1)

Splab (574204) | about 4 months ago | (#46683453)

Considering the book "Flash Boys" is about how fucked up HFT is and how bad it is for investors, one does wonder what kind of agenda you are pushing, claiming the exact opposite.

I have a wise idea. (1)

Lieutenant Halfabeef (3607343) | about 4 months ago | (#46683027)

Captchas on all trades.

Re:I have a wise idea. (1)

StripedCow (776465) | about 4 months ago | (#46683247)

Doesn't work: http://www.danielmiessler.com/... [danielmiessler.com]

Re:I have a wise idea. (1)

Immerman (2627577) | about 4 months ago | (#46683591)

Ah, but we're not necessarily trying to lock out computer trading, just remove its massive advantage over human traders. I would bet that a mechanical turk-based captcha bypass would take considerably longer than a human trader typing in the captcha personally. Of course that might just mean the HFTers employ rooms full of captcha-typers, but you've still removed the ability to react on millisecond timescales.

Re:I have a wise idea. (1)

StripedCow (776465) | about 4 months ago | (#46683687)

In that case a short delay added to the order should do the job just fine. No need to mess around with captchas.

Install random delay (5, Interesting)

Whammy666 (589169) | about 4 months ago | (#46683031)

A better system is to install a random delay of between 1 and 5 seconds. This would level the playing field completely and kill off the HFT parasites.

random delay not enough... (4, Insightful)

Junta (36770) | about 4 months ago | (#46683133)

Again, you have an 'average' 3 second baseline to compete against. What you really want to do is accumulate trades into a queue, have said queue stop taking new trades for some period of time, then process that queue in random order. Then there truly is no difference whatsoever between trades getting in within a quantum of the trade processing slice.

Re:Install random delay (0)

Anonymous Coward | about 4 months ago | (#46683303)

I think that would make the problem worse.

The article from a few days ago; showed how a firm was able to beat the HFT guys. They did this by having their trades all show up at the same time at the different exchanges. Your way would make it worse.

Front running is about seeing the 'random' in the network. That is why they want shorter and faster networks. 2-5ms is enough to front run.

Re:Install random delay (2)

dargaud (518470) | about 4 months ago | (#46683565)

Much better system: tax it in reverse to the time it is held. Something like 10 years 0%, 1 year 5%, 1 hour 50%, 1us 90%.

Re:Install random delay (1)

RogueWarrior65 (678876) | about 4 months ago | (#46683651)

Until somebody gets a hold of the random number generator algorithm. You'd almost have to use some sort of biological process to generate the seed (no pun intended).

Re:Install random delay (0)

Anonymous Coward | about 4 months ago | (#46683903)

What's wrong with good old radiation-based RNGs?

ASIC (disambiguation) (2, Funny)

tepples (727027) | about 4 months ago | (#46683045)

I wonder how hard this proposal by the Australian Securities and Investment Commission (ASIC) will hit makers of Application Specific Integrated Circuits (ASIC) designed to evaluate quotes and request trades.

End the Accounting tricks (4, Interesting)

worker17 (2525968) | about 4 months ago | (#46683057)

Instead of just playing the numbers, why don't governments stop the manipulation entirely? You buy a stock, you hold it for 3 DAYS. The market adjusts for the sales and purchases instead of being artificially stimulated. The microsecond barons have to do some REAL work instead.

Re:End the Accounting tricks (3, Insightful)

mwvdlee (775178) | about 4 months ago | (#46683161)

This.
All I keep seeing is proposed delays in seconds or minutes at best.
Trading shares is effectively gaining and selling ownership of a company.
There is no valid case for wanting to own part of a company for mere seconds.
There is no benefit for most companies either, so why do they allow an exchange to permit these risks to their business?
Are there no exchanges that enforce a "minimum ownership duration" rule for the companies they list?

Re:End the Accounting tricks (1)

Immerman (2627577) | about 4 months ago | (#46683679)

I agree, but:

> why do they allow an exchange to permit these risks to their business?

How exactly does frequent trading present risks to a business? The only impact stock value has on a company is with regard to its credit worthiness and resistance to hostile takeovers, and short-duration trades are unlikely to have a long-term impact on stock value. Perhaps there could be a trader just sitting around waiting to buy up controlling stock in Company X, but they'd have to be pretty sneaky to avoid tipping their hand - that's a pretty high volume there. And I really doubt bankers pay much attention to the HFT spikes when determining credit worthiness.

Re:End the Accounting tricks (1)

DarkOx (621550) | about 4 months ago | (#46683287)

3 Days is a looong loooong time. I don't think minimum holding periods are fair to anyone, at least not above intervals of more than a few seconds. At three days imagine this situation.

On the 1st Joe buys 100 shares of $OIL_COMPANY at $10 a share. On the 3rd Jim buys 100 shares of $OIL_COMPANY for $11 a share. On the night of the third Joe and Jim are sitting at the bar watching the news, and discover $OIL_COMPANY just had a tanker run aground and its probably going to destroy a major fishery, the damages are almost certain to bankrupt $OIL_COMPANY.

Joe should be allowed sell his shares at the open on the fourth leaving Jim and everyone like him holding the bag? Joe has owned the company longer, possibly collected more dividends, paid less for the shares, he should be allowed to keep his profits at the expense of Jim and others like him? even though he and Jim both have the same quality information?

I don't see any justice or stabilizing effect to be gained with such long hold times, it will just discourage investing over all because anyone who makes a new purchase has to take the risk of sitting in a burning building while everyone else heads for the exists, until their hold period expires.

I can see doing trades in baskets of orders entered in say 60 second intervals and processed in random order inside the interval. That prevents a class system where guys with access to HFT have a shot at the getting in or out first all the time and moves it to where anyone with an Internet connection, a E-trade account, and a willingness to sit with three or four of the major news networks on a few tvs has a fair chance of transacting on whatever securities they are playing as quickly as anyone else. That seems okay.

Re:End the Accounting tricks (1)

operagost (62405) | about 4 months ago | (#46683317)

So when the CEO is indicted on fraud charges, or a factory burns down, you get to hold your stock while it tanks? This takes far less than a day to happen.

Re:End the Accounting tricks (0)

Anonymous Coward | about 4 months ago | (#46683709)

Yes! Shit happens!

Re:End the Accounting tricks (0)

Anonymous Coward | about 4 months ago | (#46683689)

Instead of just playing the numbers, why don't governments stop the manipulation entirely? You buy a stock, you hold it for 3 DAYS. The market adjusts for the sales and purchases instead of being artificially stimulated. The microsecond barons have to do some REAL work instead.

Perfect is the enemy of good enough.
I happy if we see a delay introduced at all. Moving from a 500ms delay to a 3 day delay is can wait if it means that the 500ms delay actually is enforced.
If it gives a positive effect we can start thinking about the 3 day version.
I would hate to see this not getting implemented just because of a disagreement on the duration of the delay.

Increased risk/volatility and tax (0)

Anonymous Coward | about 4 months ago | (#46683061)

So, every trade is now delayed by 500 milliseconds. If it's like that for everyone, across the board, how is that exactly deterring HFT? In fact, I'd argue that broker houses would take more risk in their programming of HFT to tackle this delay. I'm betting if this is implemented, we see a HFT runaway and market drop event within 6 months.

In the US, a micro-tax per trade would likely cut down on this absurdity. Not that my opinion matters, since I'm paying $6 a trade with the irrelevant sum of money I play with in the market.

Banks deflecting attention from themselves (2)

FreeUser (11483) | about 4 months ago | (#46683107)

High frequency trading isn't the issue. The banks are the real "insiders", and are pointing fingers at small, high frequency prop shops to deflect attention from themselves, and to get back to the bad old days when they could really gouge their customers with wide spreads.

High frequency traders make their money by having better pricing models, narrowing spreads in the market, and being able to execute and then get out of a position quickly to lock in their profits and eliminate risk. The banks like to be the middleman, with wide spreads, so that they can pocket the difference.

The net result of high frequency traders is that the rest of us can get a stock much closer to their actual value (due to narrow spreads). Yes, the high freqency traders make good money by selling the stock $0.005 off the "real" value to me and then immediately getting out of the position by reselling it a millisecond later and locking in that $0.005 profit, but I have only paid a premium of $0.005 instad of the $0.35 or worse the banks would love to gouge me for (and used to, a few short years ago).

We get rid of high freqency trading and we'll be back to the bad old days, when the real insiders really did gouge us, and we all paid far too much for our investments, and were able to sell at far too little, with the likes of Goldman Sachs pocketing the enormous difference.

As for the front-running nonsense on 60 Minutes, that's always been illegal (contrary to what we're being told), and it is not at all how high frequency trading works. If someone was in fact doing that, then they're in a whole world of hurt with the SEC (and rightly so), but this entire exercise appears much more like a distraction: blame small outsider firms who've made the marketplace more effecient and tightened spreads for problems created by corruption within the big banks, and hope no one notices...at least until the next bank-induced crash.

Re:Banks deflecting attention from themselves (2)

homb (82455) | about 4 months ago | (#46683205)

As for the front-running nonsense on 60 Minutes, that's always been illegal (contrary to what we're being told), and it is not at all how high frequency trading works. If someone was in fact doing that, then they're in a whole world of hurt with the SEC (and rightly so), but this entire exercise appears much more like a distraction: blame small outsider firms who've made the marketplace more effecient and tightened spreads for problems created by corruption within the big banks, and hope no one notices...at least until the next bank-induced crash.

This is absolutely not illegal. Here's how HFT gets one of its profit lines:
Large trades often spread across multiple exchanges. Buy 30,000 shares here, 15,000 there, etc... The regular broker submits one purchase and it gets distributed across exchanges. As soon as it hits the first exchange, say after 30ms, an HFT algo picks up on the trade and assumes that it'll happen as well on the other exchanges. So it races ahead and front-runs in the other exchanges before the regular distributed trade has a chance to arrive there.
There is nothing illegal whatsoever, since the trades are public. It's just that the HFT optimized their routes.

Re:Banks deflecting attention from themselves (3, Insightful)

OzPeter (195038) | about 4 months ago | (#46683311)

There is nothing illegal whatsoever, since the trades are public. It's just that the HFT optimized their routes.

Sure not illegal per se, but only a finite number of people can get that sort of access, so now the playing field isn't level.

Re:Banks deflecting attention from themselves (1)

homb (82455) | about 4 months ago | (#46683359)

There is nothing illegal whatsoever, since the trades are public. It's just that the HFT optimized their routes.

Sure not illegal per se, but only a finite number of people can get that sort of access, so now the playing field isn't level.

Exactly. That's one of the major complaints regarding HFT, and why the IEX exchange why created.

Re:Banks deflecting attention from themselves (1)

jythie (914043) | about 4 months ago | (#46683749)

Well, technically HFT is illegal, it is just a matter of if a judge will agree hold them to it or not. Generally courts have found, well, at least for small fries, novel technical solutions do not make something legal when doing it by hand would not be. HFT is automated front running, nothing more.

Re:Banks deflecting attention from themselves (1)

locofungus (179280) | about 4 months ago | (#46683521)

And why is this a problem?

I'm looking to sell say 50K on two exchanges - and I need to sell so I'm going to accept the best bid.

markets A and B are both offering 1.00 bid with a 1.02 ask. 20K on market A and 30K on market B are available.

I put in my 20K to market A. and I get my $20K. HFT trader with wow whiz algorithm spots my 20K order on A and races ahead to get a 30K 1.01 ask on B before I get there.

I get $30.3K on market B. Your greedy evil HFT has just made me keep more of my money and give less of it to those greedy bank market makers with their excessively wide spreads.

Re:Banks deflecting attention from themselves (2)

homb (82455) | about 4 months ago | (#46683661)

Wrong. HFT trader will bid 1.00 and sell, then as your trade comes in it won't be executed and you'll be forced to sell lower, say 0.98, which he'll gladly buy back from you. He got a completely unnecessary spread out of your pocket.

Re:Banks deflecting attention from themselves (1)

jythie (914043) | about 4 months ago | (#46683767)

Not really, the spread is still there, the buyer just pays on the higher end of it.

Re:Banks deflecting attention from themselves (0)

Anonymous Coward | about 4 months ago | (#46683729)

That's not front running. Front running would be: You (an investor) ask me (a broker) to buy 100 stocks, I buy 100 stocks and then "sell" them to you at a higher price, pocketing the difference. I already knew you were going to buy (through me) 100 stocks. This is: You (an investor) buy 100 stocks, I (another investor) assume that means you're going to buy another 100, so I buy 100 and hope to sell them to you at a higher price. At no point did I know for a fact that you were going to buy the stock back off me until you actually did.

Re:Banks deflecting attention from themselves (1)

Immerman (2627577) | about 4 months ago | (#46683723)

>being able to execute and then get out of a position quickly to lock in their profits and eliminate risk.

If they're not carrying any risk, then by what right to they lock in profits? The entire point of a stock exchange is to allow people to carry risk in exchange for profits. HFTers are simply gaming the system.

I'd increase that to ten seconds at a minimum (3, Insightful)

Karmashock (2415832) | about 4 months ago | (#46683127)

There is no earthly reason for these commodities and stocks to trade hands faster then that. What are you doing?

The primary issue here is that human beings can't keep up with it. And that's extremely dangerous. If the computer gets confused then it can smash the market before anyone can do anything about it. But if its doing its thing in ten second pulses then you can likely stop it.

The secondary issue is that the market is very unfair with high frequency trading because it gives people with a better connection a huge advantage over everyone else. Its like having a time machine. Its the insider trading of knowing what the price is going to be in .2 seconds.

Pulse the system and most of that advantage goes away. Sure, your might get your order in faster if your system placed it faster but there's less information to react to... fewer iterations of the price to buy or sell against. You buy and sell on the pulse.

The problem after this will be the dark markets... the in house trading and between house trading of stocks, bonds, futures, etc. And putting any rules on the market tends to encourage the houses to use the dark markets more and more.

Which is fine. You control that by putting laws on the houses that they can't accept certain types of money if they're doing a lot of in house trading. The money you don't let them have is the pension money. The mortgage money. The big safe pots of money that the people give to the market makers largely to keep safe and grow at some reasonable rate.

The big houses need that money or they can't make the big buys. They can't leverage it to bend markets. And that means they have to choose... do they want to go big into the dark market or have access to the pension money? Because you make it a choice and they'll mostly choose the pensions. Which means the ones that will go after the dark market will be the smaller guys... the hustlers. And whatever they might or might not do, without the liquidity of the safe money... they won't really matter.

Why are trades (pre-purchase) public anyway? (1)

phillk6751 (654352) | about 4 months ago | (#46683199)

Wouldn't it just make more sense that the trades be kept secret, using encryption until the transaction is completed? Transactions like this should prevent someone else stepping into front of line. Because this is basically what's happening, is that these machines are taking advantage of a security flaw that allows them to see a transaction before it's complete, It would be similar to going to a grocery store where you're ready to pay and someone behind you hands the cash to the cashier before you can get your money out and takes your stuff. That kind of behavior certainly wouldn't be tolerated at a grocery store (they'd definitely get punched in the face!), and shouldn't be tolerated on the stock market. The delay really wouldn't work....it would only take 5 seconds longer for you to find out you've been had, which means they're now stealing your time too. Any moderately useful encryption where public/private keys are used, like PGP, for any transaction prior to being completed would fix this.

Re:Why are trades (pre-purchase) public anyway? (1)

homb (82455) | about 4 months ago | (#46683405)

Because this is basically what's happening, is that these machines are taking advantage of a security flaw that allows them to see a transaction before it's complete

No. They see the completed transaction at one exchange for X shares, and assume you're doing the same thing at the other exchanges. They just race there faster and preempt your transactions that are on the way.

And they also consistently post fake offers that they retract in order to analyze the market appetite.

Just tax every trade (3, Insightful)

Squidlips (1206004) | about 4 months ago | (#46683267)

Capital Gains or some such tax. That will stop this crap....

TAX THEM! (4, Insightful)

Anonymous Coward | about 4 months ago | (#46683321)

Add a 1% tax to all stock SELL orders where the seller has held the security less than a day.
Lower the tax to 1/2% for SELL orders where the seller has held the security for less than a week.
Lower to 1/4% for securities held less than a year.

This scheme would:
a) Raise a large amount of revenue
b) Constitute a 'use tax', kind of like a road toll.
c) Only affect people engaged in short term trading (e.g. wall street manipulators)
d) Act as a brake to prevent market volatility (e.g. the flash crash)
e) Be immediately shot down by Teapublicans asshats, so it won't happen.

Re:TAX THEM! (1)

Boronx (228853) | about 4 months ago | (#46683751)

Capital gains tax will ruin 'murka!

neo-liberal rubbish anyway (0)

Anonymous Coward | about 4 months ago | (#46683463)

HFT does nothing for real economics: no real jobs are created, no real infrastructure, ideas or concepts developed.
In essence its a non-transitive sink hole where real 'entropy'/work flows from the 'real' the economy represented by fiat currency.

And it does so using this real money: a waste of computing power and brain power that could be used elsewhere.
Eventually laws of physis will catch up with a system designed like this: if money is tied to real 'work' at some point and this system is left to its own devices laws of entropy say its going to crash.

Ge rid of the system altogether it already destabilises the economy.

Markets should be synchronous (1)

Strange Attractor (18957) | about 4 months ago | (#46683505)

Perhaps it would be better to accumulate orders without making them public for intervals of say a second or a minute. Then at the end of each interval execute buy and sell orders with overlapping prices.

HFT = a cost to society (4, Informative)

advid.net (595837) | about 4 months ago | (#46683575)

What really annoy me with HFT, besides not being "fair", it that it as a cost and that the society doesn't benefit from it.

Building a stock exchange with top-notch computers if fine, since there is a need fulfilled here for our society.

But building new warehouses as close as possible to stock exchange computers to house top speed fiber connected computers, just to lower the delays from 600ms down to 10ms or so, to allow HFT, is a waste of resources.
No one needs that, it's just a smart way to build a sucking vampire over information systems. And this cost is always somehow reflected to society.

One big bank of my country paid a lot to move all its crucial infrastructure abroad, in such new buildings, to be able to compete in HFT.
Who's paying for those efforts? The company, the bank, instead of doing something more useful to society (investments to improve their services, etc).

Outlaw the whole practice ... (0)

Anonymous Coward | about 4 months ago | (#46683669)

HFT is just wholesale theft by from the rest of us perpetrated by the big financial institutions which have direct access to the system.

They're not 'earning' money, they're skimming money.

bin trades and add randomness (1)

RichMan (8097) | about 4 months ago | (#46683707)

a) resolution in 5 second trade blocks
            - don't resolve trades with bid/ask when they arrive. Accumulate 5 seconds of incoming bid/ask then resolve. Pass the remaining unresolved to the next interval.
b) Arrival time +10 to 20 seconds random interval -> fuzzy bin boundaries and fixed "lag". Not guaranteed to get simultaneous orders into the same trade bin. Keeps trading honest and less able to be gamed.
c) fixed lag and binning means no insta-cancelling orders.
d) no cancelling once posted into the (b) queue. Yes you trade in the lag. So does everyone else. The traders can factor that into their margins and strategies.

Would adding a CAPTCHA be feasible (0)

Anonymous Coward | about 4 months ago | (#46683787)

Should automated systems be trading at all?

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