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."'
MMORPG (Score:4, Interesting)
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).
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Like a casino. The currency still has the same value, but the thing being bet on is meaningless and valueless in and of itself.
Like Bitcoin (Score:2)
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.
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Happened before, will happen again (Score:3)
Unconnected trades (Score:2)
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
Asset Bubble verse Rent Seeking (Score:5, Informative)
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]
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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: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.
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"Rent seeking" is a technical economic term about abusive behavior and not about renting land.
And the previous poster nailed the origins of the term.
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 â" they are strictly a tax on the system. Lewis call these trades HFT.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 â" they are strictly a tax on the system. Lewis call these trades HFT.
So what? The book also notes the underlying problem - big traders with predictable behavior. Once that goes away, the so-called "rent-seeking" stopped. If HFT is a "tax", then it's a tax on traders with poor trading behavior.
they don't take capital risk (Score:3)
From the book "Flash Boys", one of the HFT companies mentioned that they were only ever "down" one day in five years. That's not actually taking risk. That's skimming a more-or-less guaranteed tax off the top.
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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.
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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'
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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.
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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 (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: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.
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Now, I realize that the US legal system is rather dumb in this regard and actually ha
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Do hammers have agency? Would the sentence "A hammer builds a house" make sense? How ab
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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.
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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.
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Thank you. I don't know why everyone keeps repeating this thing.
Well, many of our bosses keep repeating it to us, because it is a convenient excuse for their anti-social behavior. The notion, as far as I know, was first championed by that degenerate geriatric sociopath Jack Welch back in the 1980s.
A cautionary tale (Score:5, Interesting)
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.
Long-term capital gains? (Score:2)
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.
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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.
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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.
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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)
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)
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.
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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.
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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.
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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]
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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.
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They didn't do anything wrong -- they relied on the market.
There's the unintentional comedy act of the day right there. It's sad that your family members got burned, but it doesn't take a lot of brain cells to see where they went wrong. The stock markets aren't a cute, fluffy money making machine. They're just dressed up that way by people who want your money. You need to look after yourself.
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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 th
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"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
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Hedge funds tend to be used by the affluent, not by regular people with regular incomes. In addition, hedge funds usually lock your funds up... there may be only a few times a year where you can cash out and you have to give them notice (3-6 months, depending). Only investors with serious excess capital that they can afford to put aside for a few years uses a hedge fund.
And even then, hedge funds are hardly any guarantee of good returns. As a class Hedge funds returns have been horrible over the last yea
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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.
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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.
Happening For a Long Time (Score:3)
Technological solution (Score:4, Interesting)
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Re:Technological solution (Score:5, Interesting)
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.
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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.
Problem with public companies, not HFT (Score:5, Interesting)
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.
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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.
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:Now that Lewis's 15 minutes are up... (Score:4, Informative)
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
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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
sounds like Wall street business as usual (Score:3)
Frequent auctions (Score:2)
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.
Comment on the final paragraph (Score:3)
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.
Most HFT's are in trouble, anyway (Score:4, Interesting)
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.
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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
It's arrived there ages ago (Score:4, Interesting)
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.
Sounds a lot like (Score:3)
Bitcoin to me...
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Those are the OTC and pink markets.
Flipping penny stocks is like dangling your testicles into shark infested waters.
Re:Mmhmm (Score:4, Insightful)
Which is why you always do it running a mutual fund. Dangle other peoples' testicles instead.
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"Secondary markets" and "OTC" don't mean what you think they mean - Specifically, "OTC" doesn't mean "Pink Sheets". I suspect you've confused OTC for OTCBB. Both the NASDAQ and the NYSE count as secondary markets, and everything on the NASDAQ also counts as OTC, which really just means a "dealer" marker (which in turn has nothing to do with "dealers" as you might understand it, it just means direct sales between buyers and sellers, rather than an agent-mediated auctio
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most trading is done by pension and other big funds
not by hedge funds or small funds that do HFT
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.
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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 (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.
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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
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Financial transaction taxes are not better . They cut into the profits of legitimate market makers and dry up liquidity. Investors get a worse price and more volatility - leaving them worse off.
HFT are gaming the system because brokers are required to execute on "best price". Go back to "best execution" and you close the loophole that HFT use.
Re:Mmhmm (Score:5, Insightful)
Your made up and arbitrary rules will clearly solve a problem which you have not adequately described.
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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.
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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.
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Most of the money in the market is in the hands of retirement funds and other long-term investors. The gambling-addicted nutjobs provide liquidity while not harming anything but each other. More power to them, says I. Don't confuse the investment banks for the broader investing world, nor the people who actually run the exchanges.
Plus, what's all that other nonsense you're going on about? Overpopulation? Do people still believe Reverend Malthus? Technology is what lets us have growth in productivity/e
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The most effective solution to overpopulation seems to be raising the standard and security of living. The developed world has basically no population growth. As other places get economically developed, their population stops growing. Make people economically secure, arrange things so almost all babies have long lives, provide methods of having sex that don't lead to reproduction, and watch population growth stop. Technological advancement makes it possible to do this with more and more populations.
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:Mmhmm (Score:4, Interesting)
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.
Oh my fucking god. You're seriously saying that the system I described in a couple lines couldn't possibly have a fail-safe mechanism for people who make a typo and purchase the wrong stock. Open your mind a little more.
I don't care if you hate my plan, and you certainly have more experience in the market itself. But don't bring up issues like "typos" if you expect to be taken seriously.
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.
This is actually a good argument. Lead with this in future discussions with others, and forget about frickin typos.
I don't have an investment portfolio. The 401k I had at one time got cashed out a while ago. So, are the HFTs saving me money, or making my expenses go up? If they aren't saving me money, and are contributing to higher prices, I have the right to say put a limit on them. Or, if I don't have the right to limit them, what is the SEC for?
Anyhow, thanks for the responses.
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?
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I've thought about your "solution" for all of 12 seconds and already I'm buying up stocks on a daily basis so that I can lease shares to people for as long as they would like to hold them.
Congratulations on creating another, more complicated financial product.
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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.
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Me too.
Most portfolio managers and not paid a bonus based on their returns but are paid on their returns (Alpha) relative to an index (Beta).
Most pension I know off have large slug of stocks that track the index and don't move – say 80%. Then there is a thinner slice (say 20%) which is actively traded to generate Alpha – sometimes turning over dozens of times a year.
Or they split the Alpha from the Beta.
But there is always a large slug of securities that match the index. Outperforming the market
Re:Mmhmm (Score:5, Informative)
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.
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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.
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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 gam
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Investment theory has gotten a bit more sophisticated than from Gramm's day. Then factor is poor accounting and stock manipulation by management. Gramm was very conservative.
One is the recognition that it is not the dividend that is important it is the cash going to a shareholder. For example a stock buyback basically does the same thing as a dividend except that buybacks tend to trigger lower capital gains than dividend income.
Second one needs to balance the value of a payout (bird in hand) verse reinvestm
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.
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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 (Score:4, Interesting)
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.
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and front-running? (Score:3)
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.
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Pension funds, Mutual Funds, and other large investors.
The way it works is pretty simple: the stock market can blip upward or downward quite rapidly if somebody buys or sells a lot of shares extremely quickly. The market has to find outstanding shares of a company to sell (or buyers to sell them to if it's a sale), and if it can't find enough at the current price the price goes up (or down, during a sale).
If you can figure out that some pension fund is about to buy $10 million in Ford stock (symbol: F), and
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Who does high frequency trading hurt again? Who are the victims?
Pension funds, Mutual Funds, and other large investors.
Wrong. The spreads between BIDs and ASKs are smaller because of HFT - that means "pension funds", "mutual funds", and "other large investors" are getting a better price on their trades.
I know that you cannot understand that its possible for a 3rd party to enter into these transaction, make a profit, and also benefit everyone else involved... but thats because you are either a pig headed class bigot, ignorant of the mechanics of the methods of buying and selling, or lack the intelligence to figure out how
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Well, you are assuming that the company is valueless when you say that. Most companies are not valueless. Most, in fact, make a profit, and as an investor you own a piece of that profit. The profits are not a phantom... that's cold hard cash and it means something whether the company has a dividend or not. It's very real.
Many people treat the market like a game, and there are some game-like elements to it, but the underlying reality is that it isn't a game. The secondary markets have many uses... it is
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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 kn
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I thought it was 59.5. Did they change that?
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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.
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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 mak
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you left out "easy access to credit with onerous terms" and "consumerist culture that places tantamount value upon material possessions"
on my desktop background I have a drawing of a tiny little man holding up an oversized credit card, with his neck positioned over the card swiping track (basically a guillotine) -- this kind of sums up consumerist culture in my eyes. I wish I could remember the artist's name :(
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It is that way because we let it be that way. But money doesn't need to be amoral.
Money is not a god that society needs to bow down to. It is a tool that society uses to distribute resources and create a form of justice. So it follows that society should regulate money to serve its ends.. not be a slave to it. Just as you wouldn't want to create an army of warlord soldiers that reign free over humans, you don't want to let money reign free over humans.
Presently economist and politicians have become too dogm