Australia May 'Pause' Trades To Tackle High-Frequency Trading 342
angry tapir (1463043) writes "The Australian Securities and Investment Commission (ASIC), a government financial watchdog, is reportedly contemplating the idea of implementing a 500 millisecond delay on trades in an effort to put the brakes on high-frequency trading. ASIC last year knocked back the idea and stated that fears about HFT were overblown. However, in a government inquiry today representatives of the organization said the idea of a 'pause' is still on the table."
Won't work (Score:5, Interesting)
If you simply change everyone's temporal frame of reference by the exact same amount, you have done nothing, really. Everyone will simply account for the 500ms delay, and trades will still execute in the same order.
Re:Won't work (Score:5, Interesting)
The way I understand it is that traders (computers) have to hold on to shares for a minimum of 500 ms, which means that whatever the market does in those milliseconds cannot be acted upon. However, others can act in the meantime.
Personally, I think that it should be law that if you buy shares in any company (or fund or whatever), you have to hold on to them for a minimum of a week or a month. Shares represent actual physical companies which own factories and employ real people. Those things don't change in 500 ms. They change over a much larger amount of time. And I believe that the stock market would be healthier if this was reflected in its trading. Obviously, when new information comes out (press release: "The factory of company X has just gone up in flames"), everybody's counter should be set to zero, but shares sold in such a case cannot be bought back a fraction of a second later (because whoever just bought them has to hold on to them for a week/month).
I don't pretend that this plan is waterproof. I'm sure someone will shoot a big hole in it in the replies below... I just wish that the stock market would represent what it's supposed to represent: a place where people can invest in our real economy.
Re:Won't work (Score:4, Insightful)
This is enough to show why your idea won't work... unless you plan is really to collapse the economy. What information is major enough to allow immediate sales of stock, and who gets to choose?
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There's basically 3 types of information for traders:
1. Official public information from the company itself (press releases, annual report, etc).
2. Analysis by external parties
3. Unofficial (non-public) information from within the company - trading using this is called insider trading, and this is already against the law.
So, when companies release information (category 1), everybody can trade. I do realize now that large companies have press releases on a daily basis. So, maybe the timespan of a week/month
It won't work.. second entity can short (Score:2)
Even the 500ms won't work. HFT have a lot of infrastructure and resources. You can simple model your HFT in a way that there are two entities trading, one buys it, if the HFT system decides to sell it and is restricted to do so for 500ms or a week, the other entity shorts the same trade, in effect achieving the same results. IMO, you should be allowed to short trades along with this 500ms block for this to properly work.
Obviously, you can have multiple entities trading on behalf of the HF Traders.
Re:Won't work (Score:5, Funny)
I just wish that the stock market would represent what it's supposed to represent: a place where people can invest in our real economy.
I purpose the the stock market should really go back to its roots, and that every share should be attached to a genuine item of stock - be that cow, pig or chicken. And that you are responsible for housing and feeding all the stock that you own.
This would also have the interesting effect of changing our perception of Bull and Bear markets.
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The problem with requiring someone to hold onto shares for a specific amount of time is that it doesn't prevent HFT but instead adds a barrier to entry. If I buy 5 shares of IBM but then must wait a week before I can sell those 5 shares what prevents me from selling these other 5 shares I bought last week? If there was a company that held several stocks that were readily trade able other people could contract selling the shares & replacing them for a nominal fee. This would be similar to shorting sto
Re:Won't work (Score:5, Insightful)
Well let's say you want to buy a share, who do you buy it from? Or let's say you want to sell a share, who do you sell it to?
It used to be you'd actually have to find someone to step in and take the contra side of your transaction. That's a pain in the ass, will cost you time and money, and in the event you need to sell and everyone else wants to sell you're screwed. All of this would mean that unless you had lots of money to invest, the stock market was not for you.
Fast forward to today. We have people willing to take a position, any position. They provide "liquidity" for the market by buying the share you wanted to sell, in the hopes that they can turn around and sell it for a fraction of a cent more when someone comes along with a buy order. They actively manage their inventory of shares (yes that's a thing), and adjust prices in the event information comes out causing a large price change in the shares.
This is a service that needs to continue if you want modern markets to maintain their efficiency.
Now here's the problem. Back when the "marketmakers" were actual human beings buying and yelling at each other in trading pits one would not be substantially faster than another. But, using computers, there's an arms race for speed. If you can get a few miliseconds (or even nanoseconds) faster than your competition, you can take all of the profitable orders. This means if you plough enough money into speed, you can just own the market. In addition, because computers are so fast, your computer can make many millions of silly trades before a human trader can push the big red stop button.
Now a solution needs to come about. But, because of the need for market makers speed can't really be limited to holding onto shares for months. (Sorry). 500 ms basically breaks the arms race since it's a very easy speed to obtain. So, you can't just plough money into being the fastest kid on the block.
Re:Won't work (Score:5, Insightful)
The important issue is the ratio between investors and speculators. You need speculators in the market to provide liquidity, but you don't want too many because liquidity is the positive spin on volatility. If you have too high a ratio of speculation to investment then the market becomes completely decoupled from the thing it's trying to represent and it becomes a dangerous place for investors (and companies) because they can lose all of their money as a result of something completely unrelated to the actual profitability of the company. If you have too few speculators, then it becomes difficult to buy and sell shares.
The problem with HFT is not really HFT itself, it's that it magnifies the effects of speculators on the market, meaning that you need far fewer speculators with far less capital to have a disproportionate effect on the functioning of the market.
Big Red Button (Score:4, Informative)
This is currently the problem. Zero liability currently. There have been a number of LARGE examples of this, where things have gone awry, and the company loses like 500 Million. The response has been to halt trading, and reverse all the trades. To me this is cheating. They may have lost, but that just means that someone else was the winner.
If people want to use these methods, then they take the risks. They don't get to call a "redo" because things didn't work out in the way they thought it should.
After a couple of big losses like this, people might think twice about using such a service, or at least account for it within their threshold of risk. They do not own a licence to make money.
Re:Won't work (Score:4, Insightful)
This "liquidity" is a vague term used by high speed traders to justify their poaching of legitimate trades. What they really mean is that they increase VOLUME of trades. What they are doing is intercepting a trade and getting in a buy or sell first. So they double the number of transactions. However the individual investor holding onto a stock that wants to be able to sell it does not gain any extra ability to sell (liquidity) because of these extra traders, and is very likely to be gaining less money because of them.
This is not a service that improves the system, it is more like a parasite that feeds off of the system.
Re:Won't work (Score:4, Informative)
Utter rubbish.
I used to work for a high frequency firm, and I can tell you the downwards strategy is as important as the upward strategy. While in theory it is true that potential gains on the upside are unlimited and potential gains on the downside are limited to the share price this presupposes that a stock price can go to infinity. Realistically, this is not true, and realistically barring a catastrophe a stock does not go to zero. Even then a stock does not go to zero immediately when becoming worthless (see Dead Cat Bounce [wikipedia.org])
HFT is focused in on short term moves. On a short period of time, say the order of seconds, it will dominate. On a longer period of time, say hours, days, or weeks, investor sentiment will dominate. Even when HFT goes completely wonky and accidentally manipulates the market, over a period of days investor sentiment will still dominate.
Additionally, stock ownership represents ownership in an underlying company, that on average will experience growth. As profits grow, the value of the shares grow. Therefore growth in the present value of stocks is the natural state. Additionally, while you might take the counter argument that not all stocks should grow, most indices will cut out underperforming stocks. Therefore, an index is a bad indicator for the stock market at large because you are artificially selecting for winners and losers.
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I agree this would seem like a good solution. Perhaps lowering the limit to a day or an hour though to keep things fluid. As long as the time period is considerably longer than the communication delays you've removed a lot of the ways in which HFT can game the system. A short enough time period would also pretty much remove any major advantages to "resetting the clock" - Yeah, it sucks if you bought stock in a company ten minutes before the factory catches fire, and will have to wait for another 50m befor
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Personally, I think that it should be law that if you buy shares in any company (or fund or whatever), you have to hold on to them for a minimum of a week or a month. Shares represent actual physical companies which own factories and employ real people. Those things don't change in 500 ms. They change over a much larger amount of time. And I believe that the stock market would be healthier if this was reflected in its trading. Obviously, when new information comes out (press release: "The factory of company X has just gone up in flames"), everybody's counter should be set to zero, but shares sold in such a case cannot be bought back a fraction of a second later (because whoever just bought them has to hold on to them for a week/month).
A week or a month might be a bit too long, but something along the order of 1-5 minutes might be reasonable.
Alternatively, one might also have the exchange do batch orders: traders submit their orders to the exchange, the exchange groups them all together, and then processes them all periodically (say, every 30 seconds or something), then displays the results. Since the results are not released until after the batch is fully processed there's no advantage to submitting an order at 29.999 seconds compared to
Re:Won't work (Score:5, Insightful)
There's no need to set a minimum time; what is needed is a minimum tax or fee. It could be .01% and still completely put a stop to abusive trading.
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And then we go back to the grand old days of the market where a broker (called market maker) skims 3-5% off every trade because he's the buyer and seller of last resort.
Personally I'll take the HFT.
Tax == Arbitrage (Score:3)
Imposing a tax only means the profit threshold is raised. That creates the market distortion called "arbitrage", where the relative costs between different transactions are not symmetric.
A .01% tax per transaction would mean that for me, a small trader, there would be a net loss unless my own profit per trade is lower than .01%. For a bigger trader, the cost per trade is lower, therefore they would gain and advantage over us, the smaller guys.
The true solution? Let it be, do not change anything.
Apart from s
Re:Won't work (Score:4, Interesting)
Re:Won't work (Score:4, Insightful)
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Overnight, we'd have a stable, healthy, growing
Re:Yikes (Score:5, Insightful)
Stop the bullshit. You're not changing your mind, you're trying to gain a lot very quickly by gambling.
If you don't understand the implications of what you're doing, please go to the casino instead of messing up our global economy.
Re:Yikes (Score:4, Informative)
The concept is that the market is supposed to be for investing. Investing implies certain loss of liquidity (no idea what you mean by loss of value). That said, see my response.
Re:Yikes (Score:5, Insightful)
The traders are the only people who gain tangible benefit from that, though. It's only their insistence that makes the spread so small, and the duration so large.
The rest of us are interested in laws that facilitate investment, you're interested in laws that let your manipulate people with less immediate knowledge of the market than you.
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A week?! A month?!! How do you propose to compensate me and others for the loss of value and liquidity created by your arbitrary market rules and centrally controlled economy? Will you or the government either put up part of the purchase price to compensate for your partial control, or allow me to write off losses caused by the proposed rules? What's wrong with me immediately changing my mind after a trade?
How about instead a Ultra-Short Capital Gains tax rate at 100%. Trade as fast as you want but unless you hold it for a week or month, you pay out all your profits. You're as liquid as you need to be. You don't have to ban it, just de-incentivise it.
Re:Yikes (Score:4, Insightful)
Re:Yikes (Score:4, Insightful)
That's a nice sense of entitlement you've got there.
How much should we compensate muggers for outlawing mugging?
How much do you propose to pay in compensation for the damage caused by HFT?
Re:Won't work (Score:5, Insightful)
Re:Won't work (Score:5, Informative)
"... the illegal practice of a stockbroker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers."
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Re:Won't work (Score:5, Interesting)
By putting in a delay of 500 ms, you prevent this kind of behavior.
Why is that behavior bad? Because for high volume traders they have to split a single order over multiple markets - mainly because others are ALSO splitting among multiple markets.
That is, say I have 500,000 shares to sell. Currently 5 different markets all show a price of 35.2, at 100,000 shares being offered
Moreover, all 5 markets offers are from you, as you are the main guy buying right now.
It is NOT fair for you to take 100,000 of my order at 35.2, then instantly cancel your four other 100,000 orders and replace them at 35.4
You offered to buy all 500,000 at 35.2, not just that 100,000 and should not be allowed to cheat me by raising your price for the remaining 400,000.
A delay of 500 ms means you can't see that your first order is executed until after all your other orders are ALSO executed.
This is one simple example of how HFT try to unethically game the system.
Comment removed (Score:5, Interesting)
500 ms (Score:2)
Thats half a second in laymans terms
If you need to sell some stock or commodity within a second of buying it, then something is wrong
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True.
However, I still think it is wiser to slowly increase the delay from 0ms to 500ms over several months, because that would prevent any shock waves going through the markets.
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If there's nothing wrong with HFT then this would be a pointless change. I have to agree that a slow increase might be wise - we've already established that the majority of trading by volume is by HFT algorithms, which by their nature are incapable of exercising common sense, and have in fact caused massive swings in the market simply through their emergent reactions to random noise and each other.
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Thats half a second in laymans terms
If you need to sell some stock or commodity within a second of buying it, then something is wrong
They need a 20 minute sell ban, plus a 1ct price tag for each buy.
How does this simply not move the goalposts? (Score:4, Insightful)
If the whole point is to be x microseconds ahead of the other guys wouldn't a 500 ms delay simply mean the exact same game would become 'after 500 ms, still be a few microseconds ahead of the other guys'.
I would imagine a more effective approach would be to process trades 4 times per second. A request for a trade always gets processed in the slot after the next slot (meaning no less than a 250 ms delay, but no more than 500 ms delay). Within a given slot of trading activity, randomly shuffle the requests so that someone beating someone else by less than 250 ms doesn't actually affect things.
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One of the major problem is when an HFT sees your making a trade in exchange A, it assumes you're going to be hitting the other exchanges for similar trades and beats you to them. I don't see how putting a delay in a trade at a single exchange would help.
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Well my thought would be that multiple exchanges would implement the same scheme. In that case, someone coming in as late as 249 milliseconds after you has a 50/50 shot of being ahead of your trade anyway. Yes, one exchange wouldn't be enough, but the more exchanges that did the scheme, the less this would help.
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How about: incoming trades are delayed by a random amount of time (within reasonable limits).
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This solution does more or less solve that problem as well. Nobody but the exchange will have a view of the orders for at least a 250ms but possibly as long as a half second under the parents scheme. That will anyone selling or buying in enough volume to be a market mover on anything but the smallest of micro caps likely has the technology to submit orders to each exchange they mean to trade on inside that window where the HFT guys will not have the opportunity to do any new price discovery.
That should ef
Re:How does this simply not move the goalposts? (Score:4, Insightful)
In this case, the question is 'what's the downside?' If HFT isn't really a problem, then what harm would it be to level the playing field to 250 ms or whatever quantums? If HFT is a big deal, then this would fix it. If it is not, then it wouldn't change things much.
Certainly some financial institutions are heavily investing in HFT relevant schemes, so they at least believe that HFT impact can be significant.
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This could be more difficult to implement, because you'd need to keep track of all the trades.
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Agree, if it's a *delay* it does nothing. If it's an *interval* it would help. And I think a 5sec interval would be good. That would eliminate all technological competition, putting the servers in the exchange basements with hot-swappable, consumable CPUs and bleeding-edge network gear on par with a RasPi on the other side of the planet.
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Won't work. How do you suppose trades actually go through and prices get discovered? Trading and price discovery sort of works like an auction. An auction is not effective if you randomly scramble the order the bids come in.
I say like an auction because there's not actually an auctioneer, it's more complicated than that. Some people do what's called passive execution. They put a quote out there that says "I'll buy XYZ at $x and sell at $y." Other people do what's called aggressive execution. They see
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Before outlawing it in a pique of jealousy at some perceived cosmic injustice, is this kind of trafing actually a problem?
If the real danger is a scenario where computers issues millions of trades in a few seconds in some feedback loop watching each other and making predictions, a 500ms slowdown could be just what the doctor ordered, slowing things down by 3-4 orders of magniude.
Only delay sell orders? (Score:2)
I was first thinking that there should be a minimum holding period of five seconds, but I'm not sure that's technically feasible. How about only delaying sell orders? That would effectively create a minimum holding period.
Why not just a small transaction fee? (Score:3)
This might work or just have the delay a random amount between 1 and 5 seconds but I
think the better solution would be to just increase the transaction cost as presumably this
is putting a fair amount of load on the system as well.
A simple transaction cost of maybe 1cent per share wouldn't affect a normal buyer at all,
would bring in money to the exchange but would put a huge damper on buying and selling
thousands of shares per second.
High Frequency Trading is kindof like email spam. The only do it because it
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Well, it would at least put a damper on HFT schemes where the profit is less than 1 cent. How common is that though? A HFT jumping in the middle of a 5-cent transaction discrepency still stands to make 4 cents.
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The trouble is that it's actually billions of dollars annually because it's on every transaction.
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1 - 5 cents is the bread and butter of HFT. The fact that it's only < 10 cents that nobody thinks it's that big a deal.
The trouble is that it's actually billions of dollars annually because it's on every transaction.
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1 - 5 cents is the bread and butter of HFT. The fact that it's only < 10 cents that nobody thinks it's that big a deal.
So it sounds like the transaction fee might need to be closer to 10cents per share.
HFT exists because the current (transaction fee + transaction cost) is too low. Just like with spam, trying to
artificially increasing the transaction cost for an electronic transaction is bound to fail but unlike spam
increasing the transaction fee is easy to implement.
I don't think you want to eliminate all arbitrage as some can be good for the market. You just want to
eliminate the fractional cent arbitrage that doesn't ben
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The problem isn't that it cost billions, the problem is that "average" people cannot accrue the benefit of that profit, directly. And this seems unfair to the "fairness police".
The issue is, that this liquidity has already saved billions of dollars because it is liquid. Nobody is complaining about the increased efficiency of the market (liquidity is efficiency). If you want to play this game, buy the equipment to play it. There are more fundamental issues with Stock Trading IMHO, that HFT is not one of them
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Or a tax. (Score:2, Insightful)
A pause just creates an arms race. Taxation is a good antidote to accumulation of money without creation of wealth.
And don't give me any of the liquidity bullshit - investment, to be rational, must be a long term exercise. And there's no reason why market makers can't charge less without the HF bullshit - hell, public or private sectors could create a non-profit market maker.
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Re:Or a tax. (Score:4, Insightful)
If you really want to shake things up (Score:2)
Better article (Score:5, Informative)
There's a gripping article over at the NY Times (adapted from a just released book) that explains very well the pitfalls of HFT, where the problems are mostly due to the haves and have-nots, just like in most things. The article is at http://www.nytimes.com/2014/04... [nytimes.com]
Not having a level playing deck in an exchange is a major problem for the correct functioning of said exchange.
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Article is not very clear. (Score:4, Informative)
The Australian Financial Review today reported that ASIC had told the inquiry into Australia's financial system chaired by David Murray the regulator would consider introducing a half-second clamp on trades to remove HFT's speed advantage.
HFT work by seeing the order in one exchange at one price, and the same thing is available in another exchange for a slightly different price, simultaneously buy in one, sell in another and pocket the difference. Plain arbitrage, something Commander Vanderbuilt apparently did back in the days when news traveled on horseback during the day time. And he traveled at night in his sailing ship and raced ahead of the news, dumping bonds from bankrupt New York corporations.
These exchanges communicate the prices between themselves and take slightly longer than 350 milliseconds for the news to travel between exchanges. These big trading companies have faster access to both exchanges and are able to act on them. Would it be enough to delay all orders by 0.5 sec? Even if one trading firm sees the price difference, before it could act on it, the news would have traveled and it could no play micro second arbitrage.
This is my understanding. It might mean any trader must hold the instruments for 0.5 sec before trading it again. Not really sure what the article means by clamp.
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Make it 20 minutes so people can understand what's going on. A sell ban for 20 minutes. And preferably a 1ct tax for each buy.
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Not really. That used to be possible but there are now so many people doing it that there aren't sufficient arbitrage opportunities to make enough money to cover your costs.
Instead it's more like this:
Consider a hypothetical stock that is worth exactly $1.
What used to happen was that the market makers would have a bid/ask of 0.95/1.05. (For a modern market that still trades with those sorts of spreads, look at gold metal. For small investors, a 5-10% bid/ask spread is fairly typical)
Someone came along and s
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Considering the book "Flash Boys" is about how fucked up HFT is and how bad it is for investors, one does wonder what kind of agenda you are pushing, claiming the exact opposite.
Install random delay (Score:5, Interesting)
random delay not enough... (Score:5, Insightful)
Again, you have an 'average' 3 second baseline to compete against. What you really want to do is accumulate trades into a queue, have said queue stop taking new trades for some period of time, then process that queue in random order. Then there truly is no difference whatsoever between trades getting in within a quantum of the trade processing slice.
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Until somebody gets a hold of the random number generator algorithm. You'd almost have to use some sort of biological process to generate the seed (no pun intended).
ASIC (disambiguation) (Score:3, Funny)
End the Accounting tricks (Score:4, Interesting)
Re:End the Accounting tricks (Score:4, Insightful)
This.
All I keep seeing is proposed delays in seconds or minutes at best.
Trading shares is effectively gaining and selling ownership of a company.
There is no valid case for wanting to own part of a company for mere seconds.
There is no benefit for most companies either, so why do they allow an exchange to permit these risks to their business?
Are there no exchanges that enforce a "minimum ownership duration" rule for the companies they list?
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I agree, but:
> why do they allow an exchange to permit these risks to their business?
How exactly does frequent trading present risks to a business? The only impact stock value has on a company is with regard to its credit worthiness and resistance to hostile takeovers, and short-duration trades are unlikely to have a long-term impact on stock value. Perhaps there could be a trader just sitting around waiting to buy up controlling stock in Company X, but they'd have to be pretty sneaky to avoid tipping
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3 Days is a looong loooong time. I don't think minimum holding periods are fair to anyone, at least not above intervals of more than a few seconds. At three days imagine this situation.
On the 1st Joe buys 100 shares of $OIL_COMPANY at $10 a share. On the 3rd Jim buys 100 shares of $OIL_COMPANY for $11 a share. On the night of the third Joe and Jim are sitting at the bar watching the news, and discover $OIL_COMPANY just had a tanker run aground and its probably going to destroy a major fishery, the damag
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Also, most of the solutions here forget that you can sell stock anywhere, including under the shade of a buttonwood tree. Make the exchanges illiquid and people will just fuck off elsewhere.
Banks deflecting attention from themselves (Score:3)
High frequency trading isn't the issue. The banks are the real "insiders", and are pointing fingers at small, high frequency prop shops to deflect attention from themselves, and to get back to the bad old days when they could really gouge their customers with wide spreads.
High frequency traders make their money by having better pricing models, narrowing spreads in the market, and being able to execute and then get out of a position quickly to lock in their profits and eliminate risk. The banks like to be the middleman, with wide spreads, so that they can pocket the difference.
The net result of high frequency traders is that the rest of us can get a stock much closer to their actual value (due to narrow spreads). Yes, the high freqency traders make good money by selling the stock $0.005 off the "real" value to me and then immediately getting out of the position by reselling it a millisecond later and locking in that $0.005 profit, but I have only paid a premium of $0.005 instad of the $0.35 or worse the banks would love to gouge me for (and used to, a few short years ago).
We get rid of high freqency trading and we'll be back to the bad old days, when the real insiders really did gouge us, and we all paid far too much for our investments, and were able to sell at far too little, with the likes of Goldman Sachs pocketing the enormous difference.
As for the front-running nonsense on 60 Minutes, that's always been illegal (contrary to what we're being told), and it is not at all how high frequency trading works. If someone was in fact doing that, then they're in a whole world of hurt with the SEC (and rightly so), but this entire exercise appears much more like a distraction: blame small outsider firms who've made the marketplace more effecient and tightened spreads for problems created by corruption within the big banks, and hope no one notices...at least until the next bank-induced crash.
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As for the front-running nonsense on 60 Minutes, that's always been illegal (contrary to what we're being told), and it is not at all how high frequency trading works. If someone was in fact doing that, then they're in a whole world of hurt with the SEC (and rightly so), but this entire exercise appears much more like a distraction: blame small outsider firms who've made the marketplace more effecient and tightened spreads for problems created by corruption within the big banks, and hope no one notices...at least until the next bank-induced crash.
This is absolutely not illegal. Here's how HFT gets one of its profit lines:
Large trades often spread across multiple exchanges. Buy 30,000 shares here, 15,000 there, etc... The regular broker submits one purchase and it gets distributed across exchanges. As soon as it hits the first exchange, say after 30ms, an HFT algo picks up on the trade and assumes that it'll happen as well on the other exchanges. So it races ahead and front-runs in the other exchanges before the regular distributed trade has a chance
Re:Banks deflecting attention from themselves (Score:4, Insightful)
There is nothing illegal whatsoever, since the trades are public. It's just that the HFT optimized their routes.
Sure not illegal per se, but only a finite number of people can get that sort of access, so now the playing field isn't level.
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There is nothing illegal whatsoever, since the trades are public. It's just that the HFT optimized their routes.
Sure not illegal per se, but only a finite number of people can get that sort of access, so now the playing field isn't level.
Exactly. That's one of the major complaints regarding HFT, and why the IEX exchange why created.
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And why is this a problem?
I'm looking to sell say 50K on two exchanges - and I need to sell so I'm going to accept the best bid.
markets A and B are both offering 1.00 bid with a 1.02 ask. 20K on market A and 30K on market B are available.
I put in my 20K to market A. and I get my $20K. HFT trader with wow whiz algorithm spots my 20K order on A and races ahead to get a 30K 1.01 ask on B before I get there.
I get $30.3K on market B. Your greedy evil HFT has just made me keep more of my money and give less of it
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Wrong. HFT trader will bid 1.00 and sell, then as your trade comes in it won't be executed and you'll be forced to sell lower, say 0.98, which he'll gladly buy back from you. He got a completely unnecessary spread out of your pocket.
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>being able to execute and then get out of a position quickly to lock in their profits and eliminate risk.
If they're not carrying any risk, then by what right to they lock in profits? The entire point of a stock exchange is to allow people to carry risk in exchange for profits. HFTers are simply gaming the system.
I'd increase that to ten seconds at a minimum (Score:4, Insightful)
There is no earthly reason for these commodities and stocks to trade hands faster then that. What are you doing?
The primary issue here is that human beings can't keep up with it. And that's extremely dangerous. If the computer gets confused then it can smash the market before anyone can do anything about it. But if its doing its thing in ten second pulses then you can likely stop it.
The secondary issue is that the market is very unfair with high frequency trading because it gives people with a better connection a huge advantage over everyone else. Its like having a time machine. Its the insider trading of knowing what the price is going to be in .2 seconds.
Pulse the system and most of that advantage goes away. Sure, your might get your order in faster if your system placed it faster but there's less information to react to... fewer iterations of the price to buy or sell against. You buy and sell on the pulse.
The problem after this will be the dark markets... the in house trading and between house trading of stocks, bonds, futures, etc. And putting any rules on the market tends to encourage the houses to use the dark markets more and more.
Which is fine. You control that by putting laws on the houses that they can't accept certain types of money if they're doing a lot of in house trading. The money you don't let them have is the pension money. The mortgage money. The big safe pots of money that the people give to the market makers largely to keep safe and grow at some reasonable rate.
The big houses need that money or they can't make the big buys. They can't leverage it to bend markets. And that means they have to choose... do they want to go big into the dark market or have access to the pension money? Because you make it a choice and they'll mostly choose the pensions. Which means the ones that will go after the dark market will be the smaller guys... the hustlers. And whatever they might or might not do, without the liquidity of the safe money... they won't really matter.
Just tax every trade (Score:4, Insightful)
TAX THEM! (Score:4, Insightful)
Add a 1% tax to all stock SELL orders where the seller has held the security less than a day.
Lower the tax to 1/2% for SELL orders where the seller has held the security for less than a week.
Lower to 1/4% for securities held less than a year.
This scheme would:
a) Raise a large amount of revenue
b) Constitute a 'use tax', kind of like a road toll.
c) Only affect people engaged in short term trading (e.g. wall street manipulators)
d) Act as a brake to prevent market volatility (e.g. the flash crash)
e) Be immediately shot down by Teapublicans asshats, so it won't happen.
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Capital gains tax will ruin 'murka!
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I don't agree with basing the tax on time held. That's just an extra pain to audit. A simple low flat tax on each trade will already stop HFT. Even with a tiny tax, trading multiple times per microsecond will add up very quickly.
HFT = a cost to society (Score:5, Informative)
What really annoy me with HFT, besides not being "fair", it that it as a cost and that the society doesn't benefit from it.
Building a stock exchange with top-notch computers if fine, since there is a need fulfilled here for our society.
But building new warehouses as close as possible to stock exchange computers to house top speed fiber connected computers, just to lower the delays from 600ms down to 10ms or so, to allow HFT, is a waste of resources.
No one needs that, it's just a smart way to build a sucking vampire over information systems. And this cost is always somehow reflected to society.
One big bank of my country paid a lot to move all its crucial infrastructure abroad, in such new buildings, to be able to compete in HFT.
Who's paying for those efforts? The company, the bank, instead of doing something more useful to society (investments to improve their services, etc).
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It really is since they're potentially inflating the prices paid for equities.. not only by the individuals but their pensions funds. HFT shops open and close with 0 positions.. they do not hold stock past the close of business. They are simply skimming cents from transactions and that's costing people real money over the lifetimes of their investments. The stock exchange has lost all sight of it's original function to raise capital for growth investment.
bin trades and add randomness (Score:2)
a) resolution in 5 second trade blocks
- don't resolve trades with bid/ask when they arrive. Accumulate 5 seconds of incoming bid/ask then resolve. Pass the remaining unresolved to the next interval.
b) Arrival time +10 to 20 seconds random interval -> fuzzy bin boundaries and fixed "lag". Not guaranteed to get simultaneous orders into the same trade bin. Keeps trading honest and less able to be gamed.
c) fixed lag and binning means no insta-cancelling orders.
d) n
HFT algorithms already manage this (Score:2)
HFT also manages the randomness in order presentation. At millisecond resolution TCp/IP collisions cancelations become a serious issue. The smae ACM issues discusses how to game this.
Evey constraint you popose algorthmically will probably be beaten by another clever computer executed alg
TAX (Score:2)
Add Delay (Score:5, Funny)
They could switch the trade system to .NET. As London discovered, delay functionality is already built in.
serious problems with networking equipment in HFT (Score:4, Informative)
http://www.nytimes.com/2014/04... [nytimes.com]
this article explains in depth what the problem is. the SEC has now been alerted to the problem, and is investigating. the people who found the issue believed originally that this was deliberate, but it actually just turned out to be a systemic problem of the speed differentials between different routes that high-frequency trades come in at.
what they originally discovered was that they could see a price on a screen, but the moment that they put in the bid to a number of brokers, the price would DISAPPEAR. they thought that this was deliberate, that someone was scamming them: it turned out that this wasn't true, but it took a couple of years of investigation to find out. what they did was they put in *individual* bids *directly*, and found that they were accepted. they then investigated various combinations, introducing delays into the bids, and found, amazingly, that it was down to the *time of arrival at the exchange* of their bids as they were sent via numerous brokers.
so it was only when they invented a tool (which they called "Troy") that *deliberately* introduced networking delays, such that the bids would (as best they could manage) arrive within milliseconds of each other at the exchange, that they managed to trade successfully.
if however any one of those bids happened to go via a different ISP, or a different router, or any other random combination, then the bids would *FAIL*.
the problem it turns out is that these delay effects are well-known. most of the money in high-frequency trading is therefore made by seeing a slightly slower broker's prices, then putting in an undercutting bid *knowing full well* that the other broker has a slower network. and this aspect of high-frequency trading is what is currently under investigation by the SEC.
*this is why the introduction of networking delays is so absolutely important*.
the people who discovered this phenomenon basically had to set up their own independent exchange in order to solve the problem. they needed to introduce a delay of 350ms as a way to make things fair for everyone. they did this by basically putting in 38 miles of fibre-optic cable in a shoe-box in the basement of the server farm that they leased.
it turns out that once investors discovered this, they began *specifically demanding* that their trades *exclusively* be brokered through this new exchange that had this 350ms shoe-box delay. it actually caused a lot of embarrassment for a number of brokers and trading houses because the brokers were explicitly disobeying their client's instructions, because the brokers didn't understand how important this really is.
anyway: you really have to read that article (or the book) fully because it's quite complex, and it's basically an inherent flaw down to the fact that the internet (TCP/IP) is routed randomly, thus introducing gross unfairness that has become the subject of intense investigation, very recently.
so yes, *all* trading should be done with at least a 350ms delay.
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Doesn't work: http://www.danielmiessler.com/... [danielmiessler.com]
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Ah, but we're not necessarily trying to lock out computer trading, just remove its massive advantage over human traders. I would bet that a mechanical turk-based captcha bypass would take considerably longer than a human trader typing in the captcha personally. Of course that might just mean the HFTers employ rooms full of captcha-typers, but you've still removed the ability to react on millisecond timescales.
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In that case a short delay added to the order should do the job just fine. No need to mess around with captchas.
Re: (Score:2)
Because this is basically what's happening, is that these machines are taking advantage of a security flaw that allows them to see a transaction before it's complete
No. They see the completed transaction at one exchange for X shares, and assume you're doing the same thing at the other exchanges. They just race there faster and preempt your transactions that are on the way.
And they also consistently post fake offers that they retract in order to analyze the market appetite.