Should high frequency trading be banned?

[basilio]

I assume most people on the Forum have heard of High Frequency trading ? Essentially it enables traders with instant access to the stock market to effectively make trades ahead of the rest of the market.

Michael Lewis has just written a book on the subject which has exposed the nature and profitability of the process.
Thoughts ?

Michael Lewis has shown how tech nerds rigged the stock markets. But who will guard the geeks?
The Moneyball author's latest book is a warning about the 'politics of expertise' – about how access to complex technologies confers incredible power and an ability to outsmart public regulation and oversight

Light travels at 186,000 miles a second in a vacuum, which is another way of saying that it covers 186 miles in a milli-second – a thousandth of a second. Given that much of our contemporary electronic communications are conveyed by pulses of light travelling along fibreoptic cables, we are given to extravagant hyperbole about the "death of distance". After all, if a message – or a file – can traverse the globe in the blink of an eye, it doesn't matter whether your hard drive is on your desktop or in a server farm in Nebraska or Sweden.

But it turns out that the speed of light is of great practical interest to some people. One group of them have shelled out $300m to lay a fibreoptic cable in a straight line from Chicago to New York. This involves, among other things, drilling through mountains and under urban areas. And for what? So that the time taken to send a signal between New York and Chicago could be reduced from 17 milliseconds to 13. For that apparently infinitesimal improvement, stock market traders were willing to pay $14m a year, plus a substantial upfront payment, to use the cable.

Therein lies the tale of Michael Lewis's enthralling new book, Flash Boys, which joins an elite but growing list of volumes that set out to explain how computing is reshaping our world. For it turns out that for people armed with the right kit, software and networking skills, an advantage of a few milliseconds is enough to let them turn a $14m annual subscription into annual profits of $20bn.

http://www.theguardian.com/business/2014/apr/06/michael-lewis-flash-boys-high-frequency-traders

 

[CanOz]

Predatory HFT where the algorithms try and predict what you are going to and do it before you do ( referred to as front running in the book), there by making you pay more, should be banned. All HFT is not like this though. There are many kinds, most of it is needed and in fact the market may collapse with no liquidity if it was suddenly 'unplugged'...

Read the book, highly recommend it....Go Brad!:bowdown:

 

[SirRumpole]

Predatory HFT where the algorithms try and predict what you are going to and do it before you do ( referred to as front running in the book), there by making you pay more, should be banned. All HFT is not like this though. There are many kinds, most of it is needed and in fact the market may collapse with no liquidity if it was suddenly 'unplugged'...

Read the book, highly recommend it....Go Brad!:bowdown:

I'm not a sophisticated investor, but I was thinking about this the other day. If the algorithms have built in buy and sell points, then if the market goes down to their buy level, they would buy, thereby forcing the market up, and preventing a panic crash. So I think there is a safety valve built in to HFT, and ordinary investors should be looking to long term gains, rather than try to out think the computers in the short term.

 

[DeepState]

I'm not a sophisticated investor, but I was thinking about this the other day. If the algorithms have built in buy and sell points, then if the market goes down to their buy level, they would buy, thereby forcing the market up, and preventing a panic crash. So I think there is a safety valve built in to HFT, and ordinary investors should be looking to long term gains, rather than try to out think the computers in the short term.

Spot on. Ordinary investors cannot react, let alone think, fast enough to respond to developments in the limit order book or evolve their private decision rules for what should optimally be learned given what is available.

On preventing a market crash...I diverge with your opinion. Sometimes they cause one! Flash crash. But, for deeper reasons, this is probably not the case.

 

[CanOz]

What Brad Katsuyama (the main protagonist) was so upset about was when he went to purchase large blocks of stock for his clients when he was with RBC (clients = funds = moms and pops, you and I, Pensions etc.)...he would try and get a fill at a level and as soon as he pressed 'send', the offer lifted and he had to pay more. What was happening was the algorithm was buying the stock and then selling it back to Brad, at a profit. It determined the demand, then acted on that information. The net affect to the funds has been 100s of billions of dollars skimmed from the 'long term' investors...so they claim.

Again, there are many different types of HFT's, many of them beneficial for liquidity. Its only the ones that make use of their speed to get in front of large orders that they're not impressed with. Its like trading with inside information...to them.

 

[skc]

I'm not a sophisticated investor, but I was thinking about this the other day. If the algorithms have built in buy and sell points, then if the market goes down to their buy level, they would buy, thereby forcing the market up, and preventing a panic crash. So I think there is a safety valve built in to HFT, and ordinary investors should be looking to long term gains, rather than try to out think the computers in the short term.

Don't confuse HFT with computer trading. HFT is a form of computer trading, but computer trading is not all about HFT.

I found this a fascinating read.
http://www.nytimes.com/2014/04/06/magazine/flash-boys-michael-lewis.html?ref=magazine&_r=0

 

[banco]

I'm not a sophisticated investor, but I was thinking about this the other day. If the algorithms have built in buy and sell points, then if the market goes down to their buy level, they would buy, thereby forcing the market up, and preventing a panic crash. So I think there is a safety valve built in to HFT, and ordinary investors should be looking to long term gains, rather than try to out think the computers in the short term.

I think when the flash crash happened it became apparent that a lot of the HFT systems just turn off in the case of extreme events.

 

[DeepState]

I think when the flash crash happened it became apparent that a lot of the HFT systems just turn off in the case of extreme events.

There was a government enquiry in the US on this. It was worse than 'turn off'. Basically a large sell order of e-Mini came through from a mutual whish punched the market. A bunch of HFT must have been net long. This crushed their inventory and they were forced liquidators. The original sell order was without price limit and just kept on going - it was worth 9% of estimated daily volume. That's no joke. This action required the arbs to bring down the physical market with it.

Then, when the futures hit the circuit-breakers and everyone got a chance to take a breath, order was gradually restored.

It is thought that an earlier, slower version of this type of thing, portfolio insurance, was responsible for the severity of the 1987 crash.

 

[DeepState]

I found this a fascinating read.

Thanks for this. Enjoyed it. Now for the book...

From the ground...the low latency game was largely over by around 2008-2010. What isn't mentioned in this article is another element that gave HFT advantages that go over the line and are under investigation. They were given access to market information including order flow not generally available to the rest of the market but which is price sensitive.

Beyond that, HFT is a war of algos. Probing and testing latent order flow in order to predict where it will go and continually refining the algo parameters as profitability shifts. Even in IEX, the broker algos, possibly via DMA (Direct Market Access) through the brokers can still pursue this game. And it's a fair game because anyone can do it - well, they can aspire to do it.

Turning up to daytrade against this, to put your money up against this with a ComSec account and an internet link, trading by hand is not like turning up to a gunfight with a knife. In that situation, the guy with the knife actually has a chance.

 

[polpak]

IMHO is not the trading so much as the depressing constant dribble of small parcels trading at prices most retail traders not able to use, thus retail traders feel they are being gamed.


IMHO quickest resolution method be to force a limit on their parcels to a minimum value (eg $500) like most retail traders.

 

[explod]

IMHO is not the trading so much as the depressing constant dribble of small parcels trading at prices most retail traders not able to use, thus retail traders feel they are being gamed.


IMHO quickest resolution method be to force a limit on their parcels to a minimum value (eg $500) like most retail traders.

Absolutely, picked up on this some years back and is very unfair IMHO

Of course brokers trying to buy or unload large orders can have problems in doing so without moving the,marker against themselves, but surely in lots adding to $500 should not cause a problem.

Bit off topic the last bit, but important.

 

[qldfrog]

definitively agree with you explod,
situation I have seen so often
not much move in a stable market
mice price gap buy/sell and suddenly here come a sell for 30c worth which is immediatley bought a few cents under last price and again a few cents lower, etc etc
stop loss get triggered, a minute later price back to the average of the day
not hard to see that less than a hundred bucks was spent to create an event (low /high)
and this can even be followed by a release to the market of a positive news on the same day
Some people are very lucky...often...
I do indeed believe the market is rigged, but I have no other market to play..
so I move more and more to ETF and options/major players only for the australian market

 

[CanOz]

Actually people have been gaming the markets since the markets became the markets....

Spoofing, icebergs, stop running...its all part of the game. All part of a normal auction.