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High Frequency Trading and Finance's Race To Irrelevance

timothy posted about 3 months ago | from the gaming-the-game dept.

The Almighty Buck 382

hype7 (239530) writes 'The Harvard Business Review is running a fascinating article on how finance is increasingly abstracting itself — and the gains it makes — away from the creation of value in the real world, and how High Frequency Trading is the most extreme version of this phenomenon yet. From the article: "High frequency trading is a different phenomenon from the increasing focus on short term returns by human investors. But they're borne from a similar mindset: one in which financial returns are the priority, independent of whether they're associated with something innovative or useful in the real world. What Lewis's book demonstrated to me isn't just how "bad" HFTs are per se, but rather, what happens when finance keeps walking down the path it seems to be set on — a path that involves abstracting itself from the creation of real-world value. The final destination? It will enter a world entirely of its own — a world in which it is fighting to capture value that is completely independent of whether any is created in the first place."'

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Mmhmm (0)

Anonymous Coward | about 3 months ago | (#47174607)

The secondary stock market in particular (where stocks are not directly funding a company but rather being sold amongst other investors), particularly those that don’t pay dividends, all seems like a big game to me, where everyone plays by the same rules in the hopes that they are the ones to make money.

I doubt this kind of behaviour will be going away soon, regardless of how removed from actual value stocks become.

Re:Mmhmm (1)

TemperedAlchemist (2045966) | about 3 months ago | (#47174629)

Those are the OTC and pink markets.

Flipping penny stocks is like dangling your testicles into shark infested waters.

Re:Mmhmm (3, Insightful)

i kan reed (749298) | about 3 months ago | (#47174967)

Which is why you always do it running a mutual fund. Dangle other peoples' testicles instead.

Re:Mmhmm (1)

alen (225700) | about 3 months ago | (#47174635)

most trading is done by pension and other big funds
not by hedge funds or small funds that do HFT

Re:Mmhmm (1)

Anonymous Coward | about 3 months ago | (#47174713)

Depends on how you define 'most trading'.

Most of the HFT is set up to make a market. Some large companies even set it up to HFT internally, in dark pools for rather esoteric reasons -some not so honest.

Re:Mmhmm (5, Insightful)

alexander_686 (957440) | about 3 months ago | (#47174741)

Errr.

Most stocks are held long term by long term investors. A example, as you suggest, are pension funds.
Most trading is done by short term holders – like HFT.

This is why in a single year more stocks of a company can trade than have been issued (suggesting huge turnover) yet the majority long term holders barely budge.

Re:Mmhmm (2)

alen (225700) | about 3 months ago | (#47174791)

by volume about half the trading is done by the large long term funds or corporations buying their own stock. the other half by hedge funds. on large volume days most volume is long term funds as they buy up or dump large amounts of stock.

a lot of the short term traders put money into the market. if you cash out part of your pension or other investments, someone has to buy that stock to give you the cash

Re:Mmhmm (0)

Anonymous Coward | about 3 months ago | (#47175039)

Most stocks are held long term by long term investors. A example, as you suggest, are pension funds.

Actually, if you read one of the articles that is linked from the main article (which may make me the first person in the history of Slashdot to read a LINKED article from the RTFA) the suggestion is that pension funds are expecting higher returns over shorter and shorter periods of time due to underfunding/increased longevity.

Re:Mmhmm (1)

alexander_686 (957440) | about 3 months ago | (#47175117)

Can you point out the link? I don't think it was directly reference in the underlying article.

And even if that was true I would be skeptical. Most private pension funds are well funded – public funds are another matter. If you want to crank up returns (which is not the correct choice – cranking up contributions is the correct choice) my experience is that portfolio managers move to higher risk stock – not by trying to generate trading profits with short term trades.

Re:Mmhmm (3, Insightful)

ocean_soul (1019086) | about 3 months ago | (#47175147)

Recently, I have started wondering: would it be advantageous for the stability of our economy and financial markets if there was a minimum holding time for shares, options, etc.? For example one day? That would make high frequency trading, which I agree is not really productive to the general economy, disappear. I don't think a rule like that would hinder real investors, because as you say, they hold for a longer time anyway. But it would stop speculators trying to squeeze some money by day trading without contributing anything to the economy.

Re:Mmhmm (0)

I'm New Around Here (1154723) | about 3 months ago | (#47175251)

I've said before there should be a year-long requirement on buying or selling. If you buy shares in GM, you own them for at least a year before you can sell them, or use them as any sort of collateral or trade. If you sell shares in Ford, you are not allowed to buy shares in Ford for one year as well. This goes for all investors, whether individual, corporate, or hedge fund.

This would solve the problem of Wall Street being nothing more than a gambling den, but of course it would never come to pass.

Re:Mmhmm (4, Insightful)

NevarMore (248971) | about 3 months ago | (#47175267)

Your made up and arbitrary rules will clearly solve a problem which you have not adequately described.

Re:Mmhmm (-1, Flamebait)

I'm New Around Here (1154723) | about 3 months ago | (#47175383)

All rules are "made up" you big dope. As far as "arbitrary", the post I responded to also had a time limit, but of a different duration. I notice you are absent in jumping up his asshole about it.

In short, add to the discussion with your own suggestion, or go home.

Re:Mmhmm (1)

lgw (121541) | about 3 months ago | (#47175321)

The solution you pulled out of you ass after thinking about it for 5 minutes is clearly better than what the professional experts believe. Do you have an opinion on Dark Matter too? Or the gold standard perhaps?

I wish you the joy of making a typo when buying or selling shares in your system. In today's system, people who hold shares for multiple years are the ones who do well long term, gradually harvesting money from the casino gamblers. I like today's system.

Re:Mmhmm (0)

I'm New Around Here (1154723) | about 3 months ago | (#47175427)

The reply you pulled out of your ass after 10 seconds of contemplation is clearly better than anything I might say. But then, I'm not one to hope the people ruining the system take all the wealth and then crash what's left. Hope they leave you a few crumbs, since you seem perfectly content with that outcome. Certainly we don't want to do something radical to stop the abuses we read about.

If people who hold shares for the long term are the winners, it won't matter then if that is mandated, will it? So you're arguing against the rule because...?

Re:Mmhmm (1)

GameboyRMH (1153867) | about 3 months ago | (#47175443)

The "professional experts" are a bunch of junkies jonesing like crazy who will do anything for a fix, be it crashing economies, systematically impoverishing populations or overpopulating the planet to destruction rather than accepting the impossibility of infinite growth in a finite world. Their opinions are worth no more than any layman's, at best.

Re:Mmhmm (1)

NicBenjamin (2124018) | about 3 months ago | (#47175421)

Think like you're playing a computer game. How would you get around that rule?

Derivatives are one way. A call option is the right to force some poor schmuck to sell you the stock at a given price. if the stock is $38.50, and a large order comes in momentarily blipping the price up to $38.60, then your option to buy at $38.50 gives you a profit of roughly $0.10. Buy the put option right before the sale goes through, and then sell it mid-blip (we're talking milliseconds before and after), you could make money every day. You make even 0.1% a day, with a couple hundred trading days a year, compounded, and you're making 25-30% profit a year. High frequency trading survives.

The Financial Transactions tax is a lot better because it's much harder to game, and if doesn't work at least you've paid off part of the deficit.

Re:Mmhmm (4, Informative)

DavidHumus (725117) | about 3 months ago | (#47174867)

The facts are otherwise. Based on estimates at a talk I was at recently - see the latter part of this (pdf) http://www.orie.cornell.edu/en... [cornell.edu] - traditional asset management comprises about 20% of trading volume; HFT accounts for over 30% and hedge funds for more than 25%. There may be some HFT done at hedge funds as well, but it's clear that the tail is wagging the dog.

Re:Mmhmm (1)

alexander_686 (957440) | about 3 months ago | (#47174655)

Of course, the only reason why there is a primary stock exchange is that the initial investors expect there to be a secondary stock market. This is particularly true for equity, which has an unlimited lifespan. Most investor's lifespans are shorter than that.

More to the point, stock ownership (and thus the stock market) is about ownership of the company, not the funding of the company.

Re:Mmhmm (0)

rwa2 (4391) | about 3 months ago | (#47174793)

Well, more to the GP AC's point, even the primary stock exchange is kinda pointless. I mean, investing in a company for profit essentially means you're saying, "hey, here's a company that looks like it's being mismanaged and is not performing as well as it should, I'm going to buy some stock in it in the hopes that someday, some half-decent manager will also eventually see that this company underperforming, and buy enough of my shares to get a controlling stake in the company so they can run it better until it performs to meet or exceed Wall Street expectations."

Unless you're one of these managers, which, let's face it, you're not.

Re:Mmhmm (0)

Anonymous Coward | about 3 months ago | (#47175089)

Well, more to the GP AC's point, even the primary stock exchange is kinda pointless. I mean, investing in a company for profit essentially means you're saying, "hey, here's a company that looks like it's being mismanaged and is not performing as well as it should, I'm going to buy some stock in it in the hopes that someday, some half-decent manager will also eventually see that this company underperforming, and buy enough of my shares to get a controlling stake in the company so they can run it better until it performs to meet or exceed Wall Street expectations."

Actually, if you read Graham's "The Intelligent Investor" or Graham and Dodd's "Security Analysis" you will find that they take a dim view on investing in common stocks that don't pay dividends. The idea behind owning common stock is becoming an ownership partner in the company, which means reaping the profits through dividends.

I am continually astonished by the number of high-profile American companies that do not pay dividends. I can only imagine that it is due to clueless shareholders that don't know what the purpose of partial business ownership is, or are expecting to gamble and win the lottery via share price increase.

Apple, in particular, should be paying a boatload of cash out in dividends.

Re:Mmhmm (0)

Anonymous Coward | about 3 months ago | (#47175275)

Apple, in particular, should be paying a boatload of cash out in dividends.

I assume that you consider their existing dividend stream (latest dividend on May 8 amounting to $2.5B) to be insufficient?

Re:Mmhmm (1)

slew (2918) | about 3 months ago | (#47174933)

Two things...

With many companies, the lifetime of the equities are shorter than an investor's lifetime (e.g., nearly all US-based airlines, GM, Chrysler, automobile companies, banks, energy trading companies like Enron, Calpine, PG&E, WorldCom). With some internet companies, significantly shorter...

Stock ownership with its historical PE levels, is often less about ownership of the company, than a bet on the future performance of the company.

The stock market is really about providing a safe place to gamble. Think of it like gambling in Vegas vs gambling in a smoke filled room in the basement of a restaurant wondering if you win the pot, if you are going to get out the room alive. Stocks are merely the chips in this game. They have some intrinsic value which follows the fortune of the company they are attached to, but there is an artificial shortage of chips and people that want to play the game are bidding up the value of those chips...

Why not make more chips? The internet bubble showed what happens when you create more chips (e.g, companies that issue stock) simply to fill that demand...

Contrary to popular belief, you can sell ownership securities in a company and *not* register them, or even list them in a regulated stock exchange (e.g., if the number of owners is small enough). The only purported rationale to do so is so that if securities are sold to the public at large, the public can have a fair chance to see what they are probably worth so that small-fry can play the game. High-frequency trading pretty much obliterates this idea, so you might begin to wonder what the rationale is for a regulated stock exchange to service a secondary securities market (other than a false sense of security).

If a company wanted to, it could sell partial ownership securities directly to a investment partnership and ordinary joes could invest in that partnership (if they trusted that partnership), but then the investment wouldn't be as liquid. Asset liquidity is really the only reason the stock markets continue to exist, not ownership...

Arbitrage (3, Insightful)

goombah99 (560566) | about 3 months ago | (#47174861)

arbitrage === extremely good. Keeps markets liquid. but it only requires a response time of seconds to minutes to be useful. high frequency trading is pure parasitism and should be abolished. Delays in order would remove a lot of it. Random delays in orders would be slightly more effective. And a trading tax would remove the low margin high volume trading. I have no idea why they don't implement this as see what happens. Could always unwind it if something unforseen results.

Re:Arbitrage (1)

i kan reed (749298) | about 3 months ago | (#47174995)

Could always unwind it if something unforseen results.

To play devil's advocate for a position I find distasteful, but haven't yet heard a totally valid takedown of: the neo-liberal set(republicans, libertarians, you know) argue that pragmatically speaking, regulatory laws don't get unwound.

I consider myself insufficiently informed to either debunk or accept that argument, and lack a good tool to find out more.

Re:Arbitrage (3, Interesting)

Carewolf (581105) | about 3 months ago | (#47175441)

Could always unwind it if something unforseen results.

To play devil's advocate for a position I find distasteful, but haven't yet heard a totally valid takedown of: the neo-liberal set(republicans, libertarians, you know) argue that pragmatically speaking, regulatory laws don't get unwound.

I consider myself insufficiently informed to either debunk or accept that argument, and lack a good tool to find out more.

Sweden tried a transaction tax in the 90s, but they made the tax too high (1% if I remember correctly). The results were not good for the Swedish economy so they rolled the law back. So there you go, even socialist countries like Sweden can rollback socialist laws if they turn out bad.

Re:Arbitrage (1)

Kohath (38547) | about 3 months ago | (#47175167)

Arbitrage is super helpful. If my stock is going down and I want to dump out of it before I lose any more money, frequent trades mean I'll find a buyer. I won't be stuck in a position that's losing more and more money every minute.

Who does high frequency trading hurt again? Who are the victims?

Re:Arbitrage (1)

Anonymous Coward | about 3 months ago | (#47175369)

HFT provides liquidity only when the market conditions are sunny wrt the model parameters implemented - i.e. when they can achieve a quick haircut buy exploiting information discovery to intermediate in a price matching which would have happened anyway, and HFT advocates tend to claim for themselves the spread reductions that are really due to the many more client entrants into the market, inter-bank competition, more efficient electronic trading and risk management, and elimination of manual/voice trading and operations.

They in no way act as true market makers which guarantee liquidity even in volatile trading conditions.

Re:Arbitrage (2)

fredprado (2569351) | about 3 months ago | (#47175291)

High frequency trading is consensual trading and it shouldn't be abolished on the basis that "it is not useful". If people want to engage in this activity and other people are willing to sell and buy from them who are you to say what they can or cannot do?

Re:Arbitrage (1)

Anonymous Coward | about 3 months ago | (#47175389)

Information and access asymmetry is decidedly non-consensual.

Re:Arbitrage (1)

fredprado (2569351) | about 3 months ago | (#47175409)

Sure it is. Nobody is forced to sell or buy shares. When you do it through the stock market you accept that you will do it to anybody that is interested in paying the correct price for it and that it works first-come, first-served.

and front-running? (2)

Chirs (87576) | about 2 months ago | (#47175471)

The main thrust of the book "Flash Boys" is that the HFTs get advance notice of your trade on one exchange, and then beat you to all the other exchanges to do the trade before you. This is not normal "first come first served", but rather a form of front-running.

MMORPG (3, Interesting)

taustin (171655) | about 3 months ago | (#47174609)

So it'll be like any other virtual world computer game (and with its currency being of similar value, which is to say, not all that much).

Re: MMORPG (0)

Anonymous Coward | about 3 months ago | (#47174651)

Dough.com

Re:MMORPG (2)

NoNonAlphaCharsHere (2201864) | about 3 months ago | (#47174763)

It will enter a world entirely of its own â" a world in which it is fighting to capture value that is completely independent of whether any is created in the first place.

Like a casino. The currency still has the same value, but the thing being bet on is meaningless and valueless in and of itself.

Re:MMORPG (0)

Anonymous Coward | about 3 months ago | (#47174911)

Correct, essentially it will become Bitcoin.

Happened before, will happen again (2)

Xaedalus (1192463) | about 3 months ago | (#47174641)

Dutch tulip panic in the 1700's... hell, even better example: Neil Stephenson's "System of the World" series, showed what happens when financial systems render themselves obsolete. The world moves on and financiers quickly explore new avenues, leaving the old behind. The section describing Eliza and how she made a living in Amsterdam trading percentages of non-binding stock shares is a great tutorial.

Unconnected trades (1)

Firethorn (177587) | about 3 months ago | (#47174731)

Interesting, I'd never read about the Dutch tulip panic [wikipedia.org] before...

I can only speculate that at some point regular sellers and buyers will 'take their business elsewhere' because the parasitism of HFT and it's successors reaches the point that NOT using the standard markets is more cost effective.

Right now for all the money it 'makes', HFT is still a very very small amount of total margin. Either you hit diminishing returns and stability, or the system will suffer an upheaval. I've heard that there are already alternative markets being set up that ban/limit HFT.

Asset Bubble verse Rent Seeking (4, Informative)

alexander_686 (957440) | about 3 months ago | (#47174855)

HFT is an example of rent seeking - where somebody is able to shave some of the economic profit from an activity without doing much of anything. In the HFT case, the US Congress put in a trading rule that caused a little bit of inefficacies in the market and HFT trading ruthless exploits that imposed inefficacies. Those inefficacies will never amount to a fraction a penny per share, but do it millions of times a day..

Think of it as a 160m dollar a day tax on investors. (the number comes from Lewis's book.)

See the historical Robber Barons as an example of rent seaking.
http://en.wikipedia.org/wiki/R... [wikipedia.org]

Re:Asset Bubble verse Rent Seeking (1)

BitcoinBenny (3025373) | about 3 months ago | (#47175299)

I have to disagree. HFT is not rent seeking. It requires extraordinary amounts of capital and technology in order to be successful in HFT, and similar amounts over a long period of time in order to remain so. People seem to forget that HFTs inject real money into the market in order to operate, which means they take capital risk and also reap rewards if they are good at what they do. It isn't anything like sitting on a piece of land and collecting rent, the comparison is absurd.

Re:Asset Bubble verse Rent Seeking (4, Insightful)

alexander_686 (957440) | about 3 months ago | (#47175425)

"Rent seeking" is a technical economic term about abusive behavior and not about renting land. The fact that it time skill and money does not matter. Lobbying congress for fat subsides takes "extraordinary amounts of capital and technology" but it is also considered rent seeking behavior.

http://en.wikipedia.org/wiki/R... [wikipedia.org]

On to your point. Are there classes of high speed trading that bring value? Yes. I have argued before in Slashdot that high speed trading has drastically cut the cost of trading.

However, the article reefer's to Lewis's book "Flash Boys". Lewis researches a class of traders that exploit a flaw in the trading system to "front run" trades and shave off a fraction of a penny per share. They do not bring money to the market or liquidity. They bring nothing – they are strictly a tax on the system. Lewis call these trades HFT.

Before I Lewis's book I held the same position as you. However, this HFT front running is strictly rent seeking, bring no value.

Personally, I need to figure out better names for the evil "front running" HFT and the good high speed traders.

Re:Asset Bubble verse Rent Seeking (2)

Mr. Slippery (47854) | about 3 months ago | (#47175399)

...rent seeking - where somebody is able to shave some of the economic profit from an activity without doing much of anything.

I.e., the highest and most pure form of capitalism -- a system in which the state-backed "owner" of capital extracts profit from laborers (physically and intellectual) without actually creating anything themselves.

Re:Unconnected trades (2)

Charliemopps (1157495) | about 3 months ago | (#47175029)

I can only speculate that at some point regular sellers and buyers will 'take their business elsewhere' because the parasitism of HFT and it's successors reaches the point that NOT using the standard markets is more cost effective.

They can't. HFTs are in the only market there is. The "Victims" are only losing fractions of pennies per trade, so no ones in an uproar. It will take an act of congress to fix this and they're bought and paid for by the HFT's.

Re:Unconnected trades (1)

kick6 (1081615) | about 3 months ago | (#47175343)

I can only speculate that at some point regular sellers and buyers will 'take their business elsewhere' because the parasitism of HFT and it's successors reaches the point that NOT using the standard markets is more cost effective.

Considering that a significant (though not overwhelming) chunk of the market is taken up by people storing securities in retirement accounts (i.e. 401k), and that the market has been blessed by the government as THE vehicle with which to save for retirement by making these purchases tax free, there's a large portion that simply won't ever "take their business elsewhere," because there's no place else to go without getting slammed with income tax. So these semi-blind investors are getting "taxed" by HFTers on their untaxed retirement investments, and it's better than the alternative. HFTers are taking advantage of anyone with a 401k.

Re:Happened before, will happen again (1)

Mitreya (579078) | about 3 months ago | (#47174871)

Dutch tulip panic in the 1700's ... The world moves on and financiers quickly explore new avenues, leaving the old behind

Ah, but did the people who lost on tulip investment get bailed out back then? Seems like the new way is to save the financial institutions because their collapse would be too damaging to the world.

Re:Happened before, will happen again (1)

taustin (171655) | about 3 months ago | (#47175087)

For a good account of the Tulip Panic, and other examples of how easily the public at large can be sucked in to stupid financial (and other) fads, try http://www.gutenberg.org/ebooks/24518 [slashdot.org] by Mackay.

This is news? The stock market is a house of cards (4, Insightful)

UnknownSoldier (67820) | about 3 months ago | (#47174667)

So companies shuffle stocks back and forth millions of times a day and we wonder NOW what the actual productive value is?? The whole dam stock market is based upon "confidence" aka a house of cards. As I like to say "Main St. built America, Wall St. destroyed it."

There was a good reason that companies were initially prohibited from owning other companies. Greed knows no limit.

This topic has been covered before in the documentary "The Corporation"
http://hellocoolworld.com/file... [hellocoolworld.com]

2. Birth
How the corporation came to be. Originally, corporations were set up to serve the public
good. Corporation lawyers gained rights through the US Supreme Court using the 14th
  Amendment (set up to protect slaves) that gives them the rights of a person. In the last
century, the corporation is given more and more rights while people are increasingly
stripped of theirs.

3. A Legal "Person"
Having acquired rights of immortal persons, what kind of person is the corporation? By
law, the corporation can only consider the interests of their shareholders. It is legally
bound to put its bottom line before everything else, even the public good

6. The Pathology of Commerce
If we look at the corporation as a legal person, it exhibits all the characteristics of a
psychopath using a personality diagnostic checklist by the World Health Organization.

This is news? The stock market is a house of cards (0)

Anonymous Coward | about 3 months ago | (#47174727)

Psychopath? More like a manic depressed, schizophrenic with multiple persons disorder. What we usually do is put these in asylum but i guess Wallstreet is a good name for one.

Re:This is news? The stock market is a house of ca (3, Insightful)

ewibble (1655195) | about 3 months ago | (#47174913)

Corporations have more rights than people, when was the last time you saw a corporation sent to jail? even for causing someones death, you kill someone even though manslaughter you are going to jail, if you steal you will probably go to jail. if a corporation does it, they get a fine, which relative to their income is minor.

Re:This is news? The stock market is a house of ca (1)

MozeeToby (1163751) | about 3 months ago | (#47175065)

By law, the corporation can only consider the interests of their shareholders. It is legally
bound to put its bottom line before everything else, even the public good.

There is nothing at all saying a corporation can't call out the common good in it's bylaws, mission statement, and investment perspectis.

Re:This is news? The stock market is a house of ca (1)

internerdj (1319281) | about 3 months ago | (#47175125)

I've always done best in the stock market when I'm choosing companies that are clearly operating outside the common good.

Re:This is news? The stock market is a house of ca (1)

sribe (304414) | about 3 months ago | (#47175365)

By law, the corporation can only consider the interests of their shareholders. It is legally
bound to put its bottom line before everything else, even the public good

Pure bullshit. There is no such legal requirement.

good luck (0)

Anonymous Coward | about 3 months ago | (#47174669)

Slashdice beat them with beta.

Maybe there is too much capital? (0)

timeOday (582209) | about 3 months ago | (#47174693)

Stocks themselves seem increasingly divorced from the purpose of jointly funding an enterprise. I own stock in my 401k. I have no idea who the companies are, I have no voting rights in them, I get no dividend. So what does stock ownership even mean, if it is nothing but the right to sell it on to the next person?

We are all being goaded into owning stocks by low interest rates and the elimination of pensions. My fear is that mass participation *inevitably* turns the stock market into a shooting gallery for elites who have probably already moved on to something else - whatever it is that hedge funds do. That and fleecing the stock market with these high-frequency scams.

So many people are assuming returns will be similar to the 20th century, when the global population was exploding, and only elites owned stock for the most part. I have my doubts. But I have few other options.

Re:Maybe there is too much capital? (1)

afidel (530433) | about 3 months ago | (#47174825)

If you get no dividends it's because you chose (or it was chosen for you by your 401k board) to invest in a low/no yield mutual fund. All 3 of my funds provide some dividend despite being growth oriented (I'm 35 so lower yield/higher risk funds make sense), right now the dividend is plowed right back into additional shares of the funds because taking a disbursement before you reach 62.5 has negative tax consequences, but it's still there in my annual statement and still grows my 401ks total value. I also know the top 20 stocks in each mutual fund (though these are typically only 30-50% of the funds total value).

Re:Maybe there is too much capital? (1)

rk (6314) | about 3 months ago | (#47174921)

I thought it was 59.5. Did they change that?

Re:Maybe there is too much capital? (1)

afidel (530433) | about 3 months ago | (#47174957)

I thought it moved when they moved the SS full retirement age, but I could be wrong. Either way it's a long way off for me and I'm probably not retiring till 72-75 anyways since my life expectancy based on my grandparents is 90-95.

Re:Maybe there is too much capital? (1)

Anonymous Coward | about 3 months ago | (#47174841)

You're probably getting dividends from your 401k stocks, even if they're mutual funds. They just go back into the 401k, so you probably haven't noticed. They show up in statements though.

Re:Maybe there is too much capital? (0)

Anonymous Coward | about 3 months ago | (#47174925)

The elimination of pensions is part of a long term goal to grow and secure a permanent underclass for a permanent state of inequality. Your children's children at this rate will be little better than slaves.

See also:
The destruction of unions
Regulatory capture
Vote suppression with the return of jim crowe laws. (Voter ID laws)
Grown wealth inequality in general

Re:Maybe there is too much capital? (0)

Anonymous Coward | about 2 months ago | (#47175459)

The elimination of pensions is part of a long term goal to grow and secure a permanent underclass for a permanent state of inequality. Your children's children at this rate will be little better than slaves.

Pensions are dangerous to employees. They are a promise to pay in the future (if everything works out) in exchange for lower pay today. I would support state laws that banned pensions.

See also:
The destruction of unions

Unions are a parallel management team. Unions are needed where management is incompetent. As a alternative, I suggest firing the management team.

Regulatory capture

This is a result of regulation by government. Those who are affected by the regulations spend the most time making friends with the regulators. Possible alternative: reduce the number of industries regulated, and spend the budget on more oversight of the remaining regulatory agencies.

Vote suppression with the return of jim crowe laws. (Voter ID laws)

Solution: We need more poll watchers in each and every voting precinct. This will prevent suppression and negate the usefulness of Voter ID laws.

Grown wealth inequality in general

It is not the inequality per se that is the problem; It is the poor allocation of resources by the wealthy. We must not allow bailouts. Those that cannot manage money should be forced to sell their assets.

Re:Maybe there is too much capital? (1)

alexander_686 (957440) | about 3 months ago | (#47174961)

First, dividend payout has nothing directly to do with the return of a company. If a company makes a profit it can:
        Reinvest the profit into new business
        Company pays out a dividend and you reinvest that dividend back into the company.
        Do a stock buyback / pay down debt
While it is a bit counterintuitive, if you run though the numbers you will see that all 3 strategies return exactly the same return for the investor. I am making the assumption that the company has adequate projects to invest its profits and that leverage is not an issue.

Second, while you might not have direct control of the shareholder vote you do have indirect control. Control over the 401(k) (and its voting rights) should fall to some employee committee – which legally should be separate from the ownership of the company that you work for.

A cautionary tale (4, Interesting)

6Yankee (597075) | about 3 months ago | (#47174709)

If you have the time (and if you're at work, of course you have the time!), I recommend The Great Hargeisa Goat Bubble [juliangough.com] . One guy gets his last goat killed by an aircraft so he can claim twice its value from the airport, and it all goes wrong from there.

Soon the shortage of actual goats led to a booming market in goat futures, goat options and increasingly arcane goat derivative products. This trade in young, unborn, and even theoretical goats allowed yet more money into a market whose only bottle-neck or brake up to this time had been the physical shortage of actual goats.

...until the whole thing comes crashing down.

What's the response? (0)

Anonymous Coward | about 3 months ago | (#47174715)

Hopefully it won't be to protect large banks that fuck up. Simple "don't do that" regulation will just stifle innovation, which is bad. Complex regulation will just lead to rent-seeking and regulatory capture.

So we'll probably get some combo of the worst of all three that allows lawyers, bankers, and politicians to accumulate more power and money.

Long-term capital gains? (1)

Animats (122034) | about 3 months ago | (#47174743)

Warren Buffett once suggested a 100% capital gains tax on assets held less than a year. One of the big problems we have with current markets is that short-term gains are way undertaxed. Funds are allowed to trade without paying taxes; taxes are assessed only when money comes out of the fund.

Re:Long-term capital gains? (1)

alexander_686 (957440) | about 3 months ago | (#47174999)

Funds are allowed to trade without paying taxes; taxes are assessed only when money comes out of the fund.

What funds are these? All of the funds that I can think of have to pay capital gains. A expectation might be pension funds but that is because they are tax deferred saving accounts, and retirement savings accounts are almost always tax deferred.

Re:Long-term capital gains? (1)

swb (14022) | about 3 months ago | (#47175033)

Isn't the likely answer to this (and the answer to most complaints involving HFT) something like "enhances market liquidity"?

In the case of HFT I find the answer unsatisfying, but in the case of large taxes on assets held less than a year it seems more compelling.

I wonder if the better choice might be increasing capital gains overall but cutting capital gains (perhaps in half) for assets held over 5 years. Basically increase the incentive for long-term holding versus penalizing short term holding.

Re:Long-term capital gains? (1)

sribe (304414) | about 2 months ago | (#47175467)

Funds are allowed to trade without paying taxes; taxes are assessed only when money comes out of the fund.

True, but totally misleading. You neglect to mention that realized capital gains and losses, interest received, and dividends received, must be distributed at least once per year.

Does it matter? (2, Informative)

tekrat (242117) | about 3 months ago | (#47174775)

Of course the stock market is divorced from the real world. It's its own bubble, a game played by the upper 5% to enrich themselves and fuck everyone else. They don't care as long as they get their bonus.

You really think a hedge fund manager gives a crap about real-world value? The dude is making $15 million a year shuffling stocks around and skimming right off the top of everyone. He can buy a Ferrari every other week. That's your 'real world value' right there.

The elite don't care. They have burned up America, and were well paid by the taxpayers to do it. Now they are strip-mining what's left and when the country is a empty husk, ready to collapse into a third-world nation, they will get in their private jets, and fly off to their private, gated, guarded compound in Costa Rica or Belize, and live off the interest in their Bermuda bank accounts for the next 12 or 20 generations.

Re:Does it matter? (4, Informative)

Ralph Wiggam (22354) | about 3 months ago | (#47174887)

It's its own bubble, a game played by the upper 5% to enrich themselves and fuck everyone else.

Actually, 45% of Americans own stock. 77% of Americans with a college degree.

But feel free to make up any numbers you need to support your conclusions.

Re:Does it matter? (0)

Anonymous Coward | about 3 months ago | (#47174989)

That may be true, but when the 5% cash out quick because they are privy to special information, the rest of the country gets burned. I know. Several family members had large parts of their life savings/retirement burned in the market down turns of the last 10-15 years. They didn't do anything wrong -- they relied on the market.

Re:Does it matter? (1)

Ralph Wiggam (22354) | about 3 months ago | (#47175131)

but when the 5% cash out quick because they are privy to special information

Do you have anything to back that statement up with? Or just your opinion that all rich people must be cheating assholes?

If your family members lost a large part of their life savings in the market, then they did do something wrong. They didn't properly diversify their investments, like every financial adviser on Earth, including the Wu Tang Clan, told them to.

Re:Does it matter? (1)

Anubis IV (1279820) | about 3 months ago | (#47175003)

That we own stock doesn't mean we're really playing the game in the way he suggested, any more than picking up a stick and hitting a ball with it means that you're a professional athlete.

Re:Does it matter? (0)

Anonymous Coward | about 3 months ago | (#47175133)

Since 138% of statistics are made up on the fly, why should I believe yours without a citation?

Re:Does it matter? (1)

Ralph Wiggam (22354) | about 3 months ago | (#47175217)

The Pew Research link I looked at before was actually 7% lower than Gallup's survey.

http://www.bizjournals.com/bizjournals/washingtonbureau/2013/11/18/dow-tops-16000-for-first-time-but.html

"More than half of Americans -- 52 percent -- say they own stock, mostly as part of a mutual fund or retirement account, according to a Gallup survey conducted in April."

That number was at 60% in 2009, but for a variety of reasons lots of people got out of the market after it crashed- which is of course the exact wrong thing to do.

Re:Does it matter? (1)

tekrat (242117) | about 3 months ago | (#47175417)

"More than half of Americans -- 52 percent -- say they own stock, mostly as part of a mutual fund or retirement account, according to a Gallup survey conducted in April."

--- of course they do!
How else does that Hedge Fund manager and thousands like him, make those millions? From the millions of Americans who are suckers and believe that the market can work for them and make them money. In reality, they are working hard to make money for the fund manager!

Sure, he gives them something back, but like any other good pyramid scheme, the vast majority of the wealth goes into his own pocket. I can make you a statement account that shows you are making money in my fund -- but that doesn't mean you actually are. Just look at the number of class action lawsuits and tell me that this isn't a grey-area legal scam.

Re:Does it matter? (3, Insightful)

Anonymous Coward | about 3 months ago | (#47175229)

Actually, 45% of Americans own stock.

That's precious. 90% of Americans have a bank account so I guess that means there's virtually no wealth disparity at all.

Re:Does it matter? (0)

cyborg_monkey (150790) | about 3 months ago | (#47175247)

Oh shut up.

Re:Does it matter? (1)

m00sh (2538182) | about 3 months ago | (#47175253)

Of course the stock market is divorced from the real world. It's its own bubble, a game played by the upper 5% to enrich themselves and fuck everyone else. They don't care as long as they get their bonus.

You really think a hedge fund manager gives a crap about real-world value? The dude is making $15 million a year shuffling stocks around and skimming right off the top of everyone. He can buy a Ferrari every other week. That's your 'real world value' right there.

The elite don't care. They have burned up America, and were well paid by the taxpayers to do it. Now they are strip-mining what's left and when the country is a empty husk, ready to collapse into a third-world nation, they will get in their private jets, and fly off to their private, gated, guarded compound in Costa Rica or Belize, and live off the interest in their Bermuda bank accounts for the next 12 or 20 generations.

You can say the same thing about scientists. Do they work to create scientific value or play a game of their own to further their own academic careers?

HFT is possible because of the fault of the internet, database or protocol system in the finance market. I'm sure it can be fixed by a small tweak in the system. It's just growing pains of the system moving from the trading floor to computers.

Re:Does it matter? (1)

Princeofcups (150855) | about 2 months ago | (#47175485)

Now they are strip-mining what's left and when the country is a empty husk, ready to collapse into a third-world nation, they will get in their private jets, and fly off to their private, gated, guarded compound in Costa Rica or Belize, and live off the interest in their Bermuda bank accounts for the next 12 or 20 generations.

Arrogant American's seem to think they are immune to this, because it's what happens to OTHER countries. The Mexican Peso was devalued directly into the pockets of Wall Street traders a few decades back. And the same way, as soon as the US Dollar is vulnerable, it is going to be a feeding frenzy, and Americans will end up lining up for toilet paper. "Told you so" feels kind of hollow in a situation like that.

This Happened Decades Ago (0)

Anonymous Coward | about 3 months ago | (#47174807)

Shouldn't be new to anyone. There's an expression, the US doesn't create products anymore, just brands.

Guess what?, China realized they don't need the US to make brands for them, and the US is stuck with the complete lack of value in anything it does.

Happening For a Long Time (2)

organgtool (966989) | about 3 months ago | (#47174815)

After a public offering of new shares, what value does the stock market really add for that company? Sure, there are some things it helps with such as an approximate value that can be used for acquisitions, but once a company offers a set of shares on the market and collects the money from the buyer, those shares are essentially chips with the corporate logo to be bought and sold among gamblers in the world's biggest casino. At that point, those shares do little to create actual value in the real world.

Technological solution (3, Interesting)

Citizen of Earth (569446) | about 3 months ago | (#47174817)

The way I see it, you can eliminate the advantages of HFT while keeping the markets highly responsive by imposing a "clocking" scheme on exchanges. When an order is received by an exchange, it is not executed immediately but stored in a queue to wait for the next clock tick. When that comes, the order queue is shuffled into random order and then executed sequentially. Make the clock ticks wait a random period between 40ms and 50ms and any timing advantage of HFT or geography is nullified. The exchanges are still highly responsive; they just do randomized batch processing. All of the requests they receive in the previous clock period ought to be processed within the new clock period (with perhaps some occasional spill-over, in which case the new clock tick is stretched).

Re:Technological solution (1)

PRMan (959735) | about 3 months ago | (#47174897)

Just force people to hold a stock for at least 1 minute. Problem solved.

Re:Technological solution (4, Interesting)

alexander_686 (957440) | about 3 months ago | (#47175037)

What you are suggesting is book market – expect for the random part. Book markets in recent years have fared worse than quote driven markets – much worse. 5 to 10 cents worse per share – much greater than the fraction of a penny that the HFT steal.

You might want to a look at IEX. They use a quote driven model with a 350m delay. Lewis have them high praise but even they have had criticisms that they can be exploited.

Re:Technological solution (0)

Anonymous Coward | about 3 months ago | (#47175057)

I think you're overthinking the problem. Not that I disagree with the idea of introducing "clock ticks", mind. It probably is worth noting that HFT drove a lot of infrastructure improvements that you're more or less taking for granted. I say we're not really informed enough about the structure of the problem to really know for sure whether it even really is a problem.

Also, I'd like to refer you to another take on the subject [slashdot.org] . Full disclosure: Same ac posting.

Technological solution (0)

Anonymous Coward | about 3 months ago | (#47175157)

What about a token passing mechanism?

Re:Technological solution (1)

Anonymous Coward | about 3 months ago | (#47175215)

Clock ticks have been suggested to reduce HFT. The other suggestion relies on the thought that HFT is also High Volume Trading, a small "fee" or "tax" of one tenth to one thousandth of one cent per share, which would not affect almost any normal traders (since even if one bought 10,000 shares in a day, the fee would amount to $10, basically a math error), whereas the HFT bill would erode what little profit they make. Coupling the two suggestions is the winning solution.

It's not just trading (0)

Anonymous Coward | about 3 months ago | (#47174819)

This problem is everywhere, not just Wall Street. That's how we got the crash in 2008 with bank betting on debts and stuff.

Business has become focused on dividends, on giving money to investors first and foremost. Products and people are secondary goals designed to increase those dividends.
But it should really be the other way around, where the industry should be catering to people first and foremost, and rewarding investors should be secondary, as an actual reward, for having a healthy company.

Problem with public companies, not HFT (4, Interesting)

michaelmalak (91262) | about 3 months ago | (#47174835)

The HBR article notes two issues:

1. HF traders don't participate in stockholder meetings and thus their trades are divorced from steering company direction.

2. CEOs are focused on next quarter profits and, aside from a few corporate founder CEOs, are not able to have their company innovate.

The first problem is not specific to HFT. Even buy-and-hold mom and pop cannot influence a stockholder meeting because they don't own enough shares to meaningfully do so. The exception proves the rule: a bunch of Palestinian human rights defenders got together, bought some Caterpillar stock, and got a human rights issue on the agenda. Even with all that effort, the measure did not pass. And it was a large effort in coordinating. Individual stockholders usually do not organize, coordinate and campaign. (The "transaction cost" is too high.)

The second problem is caused by SEC, SOX and CEO compensation structure, not by HFT. The HBR article suggests without actually accusing that HFT is the cause.

HFT serves little purpose other than providing market liquidity (and even at that arguably harms it given the flash crash), but it's not to blame for the above two pre-existing problems of today's markets of publicly traded companies.

Proof the system works! (0)

Anonymous Coward | about 3 months ago | (#47174839)

Thank goodness ordinary folks like you and I can count on the visionaries at the Harvard Business Review to get to the bottom of it all and educate us on how HFT is becoming increasingly divorced from providing real-world value. Who could've predicted such a development?

Re:Proof the system works! (1)

ggraham412 (1492023) | about 3 months ago | (#47175077)

:-) Indeed, there's no one more devoted to keeping it real than those brilliant Harvard intellectuals.

You mean Bittcoins? (0)

Anonymous Coward | about 3 months ago | (#47174865)

I can't think of anything else completely abstracted away from real world value.

Wrong (1)

roman_mir (125474) | about 3 months ago | (#47174905)

finance is increasingly abstracting itself â" and the gains it makes â" away from the creation of value in the real world, and how High Frequency Trading is the most extreme version of this phenomenon yet.

- WRONG.

The most abstract and extreme version of 'gains' made from no value whatsoever is your Treasury and the Federal Reserve Bank.

Those are the entities that are responsible for the extreme abstraction of money away from any value and devaluation of the dollar. HFT wouldn't even exist if there was a real market, a real productive economy in the first place, instead you have NEGATIVE REAL interest rates and nobody can find any yield in this environment. The environment of destruction of private property rights, destruction of individual liberties all as a consequence of destruction of the rule of the law - the Constitution.

A right is a protection of an individual against government abuse, nothing more. Individuals are supposed to have all the rights and the governments shouldn't even exist, however since they do, they are only supposed to be delegated a very small number of precisely enumerated powers, none of which should be open to interpretation.

The government that USA had at some point was an attempt to prevent the consequences of economic and thus societal destruction that you are experiencing at this point. The Congress was supposed to originate laws and Senate was supposed to kill the laws before they made it to the POTUS. SCOTUS was supposed to evaluate the already existing laws and kill them the government usurped power through those laws it was never supposed to have in the first place.

It is all broken now, but AFAIC it cannot work as a principle as long as there is in fact such an entity as Congress (or any other) that can even PROPOSE new laws into existence.

The only laws that we need are supposed to protect private property, starting with our own bodies, the right to own and operate our own private bodies, which then extends to the right to own and operate the fruits of our labour, our property, which is only extension of our bodies and lives. If the system is based on such immutable ideas and nothing else, then government cannot regulate us, cannot regulate our businesses and steal our property (for any reason at all), only then we can have real rule of law and only then there can be no such power in the hands of the few - to DESTROY the value of the money, to STEAL through taxes, business regulations and any other form of abuse of power.

But are you, any of you prepared to accept the consequences of your own actions and accept the fact that you are responsible for your own lives and nobody else can be made a slave to you through any form of theft (taxes, regulations, inflation)?

I do not believe you are ready, vast majority of you do not even understand the words that are written here, starting with the basics, such as what a right is.

Interesting! Wonderful! Fascinating! (0)

Anonymous Coward | about 3 months ago | (#47174975)

So it really is but a superlatively gushing load of gushing superlativity, then.

Well then, that saves me reading the article. NEXT!

Now that Lewis's 15 minutes are up... (4, Insightful)

ggraham412 (1492023) | about 3 months ago | (#47175045)

...time to spam us all with another article on HFT.

it allowed the high frequency traders to peek at the ballots others were sending in to the newspaper before they arrived, in turn giving them the ability to cast their votes using information not yet available to the rest of the market.

Front running is not High Frequency Trading. The existence of front running is not an argument to limit "High Frequency Trading" any more than phishing is an argument to end high speed internet.

Until people can recognize the difference between front running (a biased ordering of particular market events) and high frequency trading (low latency response to available market data) then there really is no point in responding to this nonsense. Not as much fun as donning the tinfoil hat, I know...

Re:Now that Lewis's 15 minutes are up... (0)

Anonymous Coward | about 3 months ago | (#47175287)

Until people can recognize the difference between front running (a biased ordering of particular market events) and high frequency trading (low latency response to available market data) then there really is no point in responding to this nonsense. Not as much fun as donning the tinfoil hat, I know...

I don't think it's as simple as you make it out to be. low latency response to data that is available to you can be very much like front running to everyone else without that advantage.

sounds like Wall street business as usual (2)

ganv (881057) | about 3 months ago | (#47175113)

We have been for a long time in the situation where the financial institutions are primarily extracting rents from producers rather that contributing to economic productivity. High frequency trading is simply a particularly obvious example of this. The situation is not particularly new. Those with wealth and power have always influenced the rules to their own benefit. The question is whether there are any counter-measures that effectively push people to contribute value rather than skim off value created by others.

Mutual Funds are quite a big part of this problem (0)

Anonymous Coward | about 3 months ago | (#47175123)

I have often thought along these same lines. When you are investing in something because it has proven to make money in the past as opposed to knowing what the company does and have an interest in it, how can you vote.

If you can't vote, what "share holders" are all these corporations hiding their bad decisions on. They are making decisions to satisfy whom, and what criteria of satisfy are they using?

I was incensed with some corporations that made increasingly bad decisions and kept terrible CEOs in. I could only think it was because of what this author is seeing. Car guys should run car companies. Car guys should sit on the board to make sure their CEO is a car guy. You wouldn't have the budget division making sports cars and the performance division making mini-vans, and you wouldn't have the government step in and kill of both of those divisions... but now I am descending into a product loyal rant.

Frequent auctions (1)

GlobalEcho (26240) | about 3 months ago | (#47175199)

For those of you not frothing at the mount, Eric Budish has an interesting critique [chicagobooth.edu] and proposal to replace continuous-time markets with auctions every second or so. The idea is that being forced to wait for the next auction mitigates the advantages of low-latency trading.

I think he makes a very good argument.

when you conflate value and money, you're lost (0)

Anonymous Coward | about 3 months ago | (#47175237)

HST isn't "capturing value". It's making money. Value includes our, well, value systems -- our relationships, our morals, our ideas of how the world should be. Money is completely amoral. The biggest lie we tell ourselves is that we'll be worth more *as humans* if we have more money, and that people without money are without value. We make countless compromises to our true values to get money, and then wonder why we aren't happy. We've gotten it quite backwards.

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