High Frequency Trading and Finance's Race To Irrelevance 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."'
This is news? The stock market is a house of cards (Score:5, Insightful)
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.
Re:Mmhmm (Score:5, Insightful)
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.
Arbitrage (Score:3, Insightful)
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:This is news? The stock market is a house of ca (Score:4, Insightful)
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:Mmhmm (Score:4, Insightful)
Which is why you always do it running a mutual fund. Dangle other peoples' testicles instead.
Now that Lewis's 15 minutes are up... (Score:5, Insightful)
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:Mmhmm (Score:4, Insightful)
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:Does it matter? (Score:3, Insightful)
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:Mmhmm (Score:5, Insightful)
Your made up and arbitrary rules will clearly solve a problem which you have not adequately described.
Re:Asset Bubble verse Rent Seeking (Score:5, Insightful)
"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:Mmhmm (Score:5, Insightful)
Because I understand how markets work. Thin markets suck. Large bid-ask gaps suck. Losing 20% of your investment because you made a typo, and you take a 20% hit just between the best price you can buy for and the best price you can sell for sucks.
Let the casino gamblers provide liquidity, and rob each other. It doesn't actually cost us anything - in fact, competition between market makers (which is one thing HFT is used for) saves me a non-trivial amount in my once-per-quarter trading. It's much nicer now than even 10 years ago.
Re:Arbitrage (Score:3, Insightful)
Re:Mmhmm (Score:4, Insightful)
it is costing us tons. it is preventing economic recovery right now.
Businesses are dumping money into the stock market as it is growing by 20-30% annually while the "real economy" is stuck making 1%.
If those businesses were forced to invest in new products and growth instead of in the fake stock market we could get out of this mess easier.
the majority of companies are sitting on trillions of dollars worth of cash. it is just sitting there collecting dust. why aren't they investing it in the future of their company?