Slashdot stories can be listened to in audio form via an RSS feed, as read by our own robotic overlord.

 



Forgot your password?
typodupeerror
The Almighty Buck Your Rights Online Technology

High Frequency Trading and Finance's Race To Irrelevance 382

Posted by timothy
from the gaming-the-game dept.
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."'
This discussion has been archived. No new comments can be posted.

High Frequency Trading and Finance's Race To Irrelevance

Comments Filter:
  • MMORPG (Score:4, Interesting)

    by taustin (171655) on Thursday June 05, 2014 @03:17PM (#47174609) Homepage Journal

    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).

    • 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.

    • Independent of any real world value? Sounds like Bitcoin. Or maybe Bitcoin is merely a symptom of a larger problem that includes creating "value" out of so-called intellectual property like patents for obvious things and the latest media sensation. Which isn't bad as soon as we figure out how to eat bits and bytes.

    • It already is.

      The trouble is that you have to know the rules of the game and how it is played. It's this information that is the "keys to the kingdom" so to speak, and if you want to be let in on the rules of the game, you have to pay up to be let in the inner circle.
      The game is hidden in plain sight in the financial charts, but unless you know what you're supposed to be looking for, and when you're supposed to be looking for it - you won't be able to play the game reliably -- and it will drain your money a

  • 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.
    • 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 alrea

      • by alexander_686 (957440) on Thursday June 05, 2014 @03:46PM (#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]

        • ...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.

      • 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.

      • by m.dillon (147925)

        This might be a surprise to you, but it has already happened. The growth in dark pools is directly attributable to major investment managers exiting the public markets and doing their trading in the pools in order to avoid the HFTs and other shenanigans (both real and imagined). The public exchanges have lost a huge amount of business over the last few years... hoist by their own petard, so to speak. At least to a degree.

        Insofar as regular investors go, HFT doesn't really have much of an effect so there'

    • by Mitreya (579078)

      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.

    • by taustin (171655)

      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.

  • by UnknownSoldier (67820) on Thursday June 05, 2014 @03:26PM (#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.

    • by ewibble (1655195) on Thursday June 05, 2014 @03:54PM (#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.

      • by khallow (566160)
        By your idiotic drivel, hammers have more rights than people too. After all, when's the last time you saw a hammer sent to jail? (incidentally, this argument is chock full of irony since there probably have been hammers and corporations effectively "sent" to "jail" in the US - see below) The fundamental problem here is that corporations don't actually commit crimes any more than any other sort of property commits crimes.

        Now, I realize that the US legal system is rather dumb in this regard and actually ha
        • Re: (Score:3, Interesting)

          by ultranova (717540)

          By your idiotic drivel, hammers have more rights than people too. After all, when's the last time you saw a hammer sent to jail? (incidentally, this argument is chock full of irony since there probably have been hammers and corporations effectively "sent" to "jail" in the US - see below) The fundamental problem here is that corporations don't actually commit crimes any more than any other sort of property commits crimes.

          Do hammers have agency? Would the sentence "A hammer builds a house" make sense? How ab

    • 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.

      • I've always done best in the stock market when I'm choosing companies that are clearly operating outside the common good.
    • by sribe (304414)

      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.

  • A cautionary tale (Score:5, Interesting)

    by 6Yankee (597075) on Thursday June 05, 2014 @03:31PM (#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.

  • 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.

    • 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.

    • by swb (14022)

      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.

    • by sribe (304414)

      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? (Score:3, Informative)

    by tekrat (242117) on Thursday June 05, 2014 @03:39PM (#47174775) Homepage Journal

    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? (Score:5, Informative)

      by Ralph Wiggam (22354) on Thursday June 05, 2014 @03:51PM (#47174887) Homepage

      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.

      • 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: (Score:3, Insightful)

        by Anonymous Coward

        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.

      • by riverat1 (1048260)

        That may be true but over 80% of stocks and mutual funds are owned by only the top 10% of the population and over 35% are owned by the top 1%. Who Rules America? [ucsc.edu]

    • by m00sh (2538182)

      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.

    • 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.

  • by organgtool (966989) on Thursday June 05, 2014 @03:43PM (#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.
  • by Citizen of Earth (569446) on Thursday June 05, 2014 @03:44PM (#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).
    • by PRMan (959735)
      Just force people to hold a stock for at least 1 minute. Problem solved.
    • by alexander_686 (957440) on Thursday June 05, 2014 @04:11PM (#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.

    • by khallow (566160)

      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.

      Or you can do nothing and not worry about it. I simply don't understand why people care so much about this.

  • by michaelmalak (91262) <michael@michaelmalak.com> on Thursday June 05, 2014 @03:45PM (#47174835) Homepage

    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.

    • by TubeSteak (669689)

      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 second problem is caused by SEC, SOX and CEO compensation structure, not by HFT.

      I'm very interested in hearing about how the SEC and SOX are at all to blame for CEOs pursuing short term goals.

  • by ggraham412 (1492023) on Thursday June 05, 2014 @04:11PM (#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...

    • by m.dillon (147925) on Thursday June 05, 2014 @08:17PM (#47176427) Homepage

      In fact, the biggest money maker for a high frequency trader *IS* front-running someone else's order. Other profits from HFT algorithms, such as simple arbitrage, are a lot lower than profits from front-running opportunities. I very much doubt that the infrastructure investments HFT firms have made would be worth doing without the front-running component, so it will be interesting to see what happens down the line.

      The front-running is possible when the other person's order is placed on multiple exchanges but not delayed so it hits them all at the same time. If the order hits, say, the BATS exchange first and there is a 100ms delay before it hits, say, the NYSE, then HFT algorithms will see the order on BATS and will be able to front-run the order on the NYSE using their superior network connections to the NYSE to get ahead of the original order that is still in-transit to the NYSE.

      -Matt

    • 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.

      You seem confused about what frequency means - hint, it's not the inverse of latency. HFT is about (very) low asset holding times, not low latency of the response (although the latter is a necessary means). Case in point, the low latency part, when uses to provide liquidity (as the standard argument goes) would be indifferent to trading patterns - much like a market maker in a stock doesn't pick and choose trades and usually has a requirement to, you know, be there to make the market if needed. HFT, in the

  • by ganv (881057) on Thursday June 05, 2014 @04:18PM (#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.
  • 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.

  • I agree mostly with this article, but I have one comment on something said in the final paragraph: "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." The main point of businesses is, and always has been and always will be, to make money. They're producing something people want or need only because that is the way to get money. Otherwise, it would be a governmental subsidy or a charity, rather than a company. I think, instead, the actual dichotomy is between short term and long term gains. The examples the author gives of CEOs that have been successful by resisting the pressure from the financial markets are of companies that did make money, lots of it. There is an interesting article [joshuakennon.com] by investor J. Kennon that summarizes it as impatience robbing speculators of much higher gains they could have earned by investing in the long run. So, I think it is more a problem of speculators trying to get rich quickly; investors trying to become rich, in itself, is not so problematic.

  • by Antique Geekmeister (740220) on Thursday June 05, 2014 @06:21PM (#47175923)

    The creation of FPGA's to sit directly on the fiber leaving the stock exchanges has utterly corrupted high frequency trading. _No one_ in their remote office can get equal notice of small changes, and those FPGA's can flip transactions repeatedly as a stock rises to its new level, buying and selling and buying and selling to everyone else, and pulling their profits out of what normal traders would see. The transaction cost is much too low, and the forgiveness time to recall an unwise transaction is much too generous.

    Unfortunately, there are also inevitable phase delays and feedback loops in such systems that can destroy the value of companies, and investors, who get caught in the unplanned positive feedback. They can't be "programmed against" because programming against them would slow the transactions and lose the very profit that HFT is reaping.

    • by m.dillon (147925)

      That is total and complete nonsense. Ultimately the stock price is a reflection of the company, not the other way around. If a stock winds up being mis-priced due to an out-of-control trading program (and I've seen that happen plenty of times), it doesn't stay that way for long as investors pounce on it. You should count your blessings when it happens, because being able to buy a stock that an out of control trading program drops $10 in 60 seconds is virtually guaranteed profit.

      -Matt

  • by Opportunist (166417) on Thursday June 05, 2014 @06:36PM (#47176007)

    The "value" of stock is by no means connected to real world revenue of the issuing corporations anymore. It's just dependent on expectations of stock traders and whether or not they have any "faith" in the paper.

    So, essentially, it's not really that different from any other religion. It's lost its roots in reality long, long ago, not just since the advent of HFT. If any doubt existed, the dot.com bubble with overhyped "values" of stock of companies that never earned a single dime should've dispelled that assumption that stock value has anything to do with the real world well over a decade ago.

  • by mark_reh (2015546) on Thursday June 05, 2014 @08:32PM (#47176481) Journal

    Bitcoin to me...

Riches: A gift from Heaven signifying, "This is my beloved son, in whom I am well pleased." -- John D. Rockefeller, (slander by Ambrose Bierce)

Working...