Clamping Down on High-Speed Stock Trades: US, Canada, European regulators

http://www.nytimes.com/2011/10/09/business/clamping-down-on-rapid-trades-in-stock-market.html?hp

by gtani • 15 years ago

48 46 15 years ago

karzeem• 15 years ago

It's supposedly regulators driving this crackdown, but almost all the quotes in the article come from competitors to high-speed trading firms claiming — surprise — that high-speed trading firms need to be regulated.

yuhong• 15 years ago

Not that they don't have a point, of course.

VladRussian• 15 years ago

it isn't even a crude/primitive AI, it is just algorithms that are let loose for a limited periods of time in a limited activity space - and humans are already feeling threatened(xenophobic) as this algorithmic trading feels completely unnatural. (The reason of fairness is complete BS because professional traders have always had informational and speed advantage, it is just that it was on the human scale - seconds vs. minutes, and now it crossed into non-human microseconds scale)

Well, welcome to the 21st century. The algorithmic trading will look like a child play when in the "drone arm race", the sides would be forced to delegate final shoot decision to the drone algorithms for exactly the same reason - human speed wouldn't be enough as the millisecond advantage makes the critical difference between wining and loosing. That would be a reason to feel slightly xenophobic i guess, though we'll possibly get used to it :)

Wrt. unfair advantage vs. investors not utilizing this advanced tool of algorithmic trading - whole human history since the time of apes is just a continuous sequence of "slow" humans being ruthlessly overtaken by other humans taking [unfair like any advantage] advantage through better tools and weapons. We're direct beneficiaries of such an unfair advantage and, as we aren't the ultimate goal, just an intermediate point in this history, we'll be a victims of it in due course of that history.

huhtenberg• 15 years ago

Here's your +1 to get you out of gray area, but WRT "Wrt. unfair advantage" you should really read up on HFT in detail. All of HFT is based on the premise of getting an access to the order flow a split second sooner than everyone else. To get such access HFT firms pay very hefty fee to Nasdaq and other exchanges. That's where the unfair advantage is - not in the use of computers, but in an exclusive access to the information that not even all banks can afford.

MKT8• 15 years ago

everyone can purchase fast access. If a brokerage or a bank wanted to do it, they certainly could. It's like saying that Kinko's has an unfair advantage at making copies because it bought expensive copiers and regular folks have not.

joe_the_user3• 15 years ago

Uh,

The stock market is a human institution that theoretically is not merely a battle field but competition which serves to allocate resources efficiently and for the benefit of people, ideally all people but certainly some people.

Thus it seems legitimate to have regulations aimed to focus investment activity on questions that are really related to said resource allocation rather what is ultimately just clever front-running.

I mean, the world's production, distribution and profits process might argued to change in second these days. But it will be a while before world-resources need to be reallocated by millisecond.

jkahn4• 15 years ago

Stocks should only be allowed to trade at the speed that value is created or lost. The stock market is a human institution, (supposedly) designed to measure value of human businesses.

Trading in microseconds is ridiculous.

Trades should be in human time - essentially, minutes and hours, not seconds and microseconds. Business value does not change that quickly. HFT is representative of a financial industry set on creating ever more abstract tools and products that are more akin to gambling than representing the value of the actual business. The stock market needs to return to it's roots. There's been enough chaos already.

cellis2• 15 years ago

Humans do make decisions in milliseconds.

jkahn4• 15 years ago

Humans make decisions in milliseconds, but market factors do not change that quickly. Even major, unforecasted issues like the Japan Tsunami happened in human time.

Game_Ender2• 15 years ago

That has a feel good populist sense to it, but do you have evidence that your idea would improve things? What exactly is your proposal?

Computers are better at processing information then people, eventually they will be able to determine, in microseconds, what the market effects of world events are and execute trades. I think the world will be better off for it, not worse.

jkahn4• 15 years ago

Why would the world be better off with computers making trades?

I don't have a proposal, except that the financial industry needs to be reviewed. A good start would be to remove the products that are abstractions of the value of companies or markets rather than representative of real value. Eliminate futures and most forms of derivatives. Keep shares and managed/indexed funds. Keep everything physical (e.g. Gold, Oil, etc).

That would reduce a number of the swings in the market caused by relatively small real stock movement. Return the market to trading value, rather than trading the anticipation of what might happen

The stock market should be used for trading companies, not shifting money from owners of stocks to the financial industry by having people manipulate it.

feral2• 15 years ago

First off, business value can change quickly.

Sudden events happen. You can think of dramatic events such as terrorist attacks or death of an important executive; but there's other information, such as the public announcement of a new product (e.g. 'Apple are making a new type of device!', perhaps rapidly followed by 'Google have just said they'll support it!') that also result in fast changes.

But, most importantly, the market price provides information that influences further decisions. Maybe I'm not an expert on oil prices, but I believe if it goes below $70 a barrel, its a signal that the world economy is slowing down, and I want to dump my Google stock, because I'm only willing to accept a certain level of risk in my personal investments.

The fact that I can see the price of the oil provides me with a signal (maybe noisy), derived from aggregated intelligence of other investors. This is a useful function.

Its completely legitimate to want to sell my Google stock in response to other market signals, and as quickly as possible, in response to the new information they provide.

The fundamental value of holding the Google stock, to me, has changed, fast, because of other information that's become available.

So fundamental business value can change fast, for a variety of reasons, and it can add value to be able to respond to quick changes quickly.

joe_the_user3• 15 years ago

You've made the arguments for seconds. Maybe tenths of a second. A tenth of a second is pretty fast in my subjective perception of things.

I can't see the same argument extending credibly to milliseconds.

jkahn4• 15 years ago

Perception of business value can change quickly. Actual business value itself does not tend to change so fast. Dumping your Google stock if oil drops below $70 per barrel is solely based on your own perception and your own trading rules. The value of Google's products remain the same. If a competitor releases a new device, that is based in human time.

Does it make a difference if you sell at 12.01pm after a competitor's product announcement rather than 1pm? Right now, yes. Do I think it should? No.

The reason prices swing so quickly is because trades happen so quickly. If trading was slowed down, prices would not swing as quickly. The current situation reinforces a vicious cycle where the fastest trader has an advantage in the market.

Public share prices is a measure of how much the company is worth to people that buy shares not of how much value the company creates by selling their products. PepsiCo should be valued on how well they sell soft drink, not millisecond-by-millisecond analysis of unrelated issues.

nu232• 15 years ago

You rightly argue that a rapid change in perceived business value is possible and furthermore that it is in the interest of any given individual investor in performing very quick trades.

But your examples support relative gain, not absolute gain. Even after HFT, there will be some investors who get rid of the hot potato before others (or the opposite acquire an attractive stock). It's just that the one's who are the first to trade will have to pay more resources to access powerful technology. Situations like these arise in many non-cooperative games, like an arms race, where an improved technology leads to increased loss to both sides but is unavoidable unless there is a scope for cooperation via a treaty.

Furthermore, this leads to a systematic bias in favour of large investors and hedge funds who are the ones with resources sufficient to win the arms race.

Note, that after HFT, the market value synchronizes faster by a short interval of time. Maybe there is an argument that this leads to a large absolute gain in some form by the way it affects investors decisions, but I dont see how it does.

unabridged• 15 years ago

subsecond liquidity is definitely overrated and only serves to enrich firms who can afford colocation with the exchange while effectively taxing all other traders.

some kind of system where all trades are matched once a second or every other second, would provide all of the needed liquidity and level the playing field for all traders.

1st second: trades are accepted 2nd second: trades are matched and results are published repeat

MKT8• 15 years ago

that would reduce liquidity drastically. Think about this. Suppose all the quotes show up once a second: if the values of the assets in question are momentarily mispriced relative to some other assets somewhere in the world, HFT algorithms will attack those quotes and make money from taking liquidity instead of providing it. That would also increase adverse selection and reduce the incentives to provide liquidity, resulting in less liquidity for small investors

Bud• 15 years ago

Gosh. You mean allowing billion-dollar-poker by professional gamblers who have a six-orders-of-magnitude speed advantage over regular investors, and are also indemnified against any and all losses, might be dangerous? I'm shocked. Truly shocked.

No fucking duh. If ANYONE with any power were serious about fixing society or the world economy, this shit would be banned. Yesterday.

jacoblyles• 15 years ago

What's the harm in HFT? It certainly increases liquidity in the market, making it easier for other investors to enter or exit a position on short notice. That's a good thing.

Let's not fall pray to generalized anti-finance populism without good reason.

joe_the_user3• 15 years ago

If you read article, you may find that the argument is that the speed of the trades creates the perception of an unfair advantage and has even supposedly impelled larger buyers and seller to move the "dark pools". Now all this might wrong but it seems like a bit more than "anti-finance populism".

And the thing with the liquidity created by HFT is... if that liquidity is going to be suddenly withdrawn all at once, you've lost the advantage of liquid market, which is that you always have a reasonable chance of quickly selling at a reasonable price.

johnl• 15 years ago

Maybe requiring registering and stress testing of HFTs over a specific volume is a solution. Or as a cost of registering a HFT is a requirement to "make the market" whether the HFTer likes to or not , there should be plenty of opportunities to hedge or offset any unwanted positions.

_sh• 15 years ago

Interesting question. What if HFT algorithms become so efficient they are able to easily out-compete human trading decisions, such that humans exit the system altogether? What if the stock exchange becomes exclusively HFT algorithms competing against eachother on behalf of large funds, such that being a 'trader' is all about which fund to put money into (which algorithm suite to back)?

In such a thought experiment, what if the algorithms discovered more money could be realized by trading on a vector different to 'the current/future worth of a company'? Say a genetic algorithm determined that whether the share price ended the week's trading on an odd number rather than an even number is more important for predicting the future direction of the price on Monday. In the world of genetic algorithms, stranger shit has happened. What impact would this have?

I don't know much about trading, particularly HFT, so I don't even know if this is possible or realistic. I do love thought experiments though, and believe that HFT algorithms are currently trying to predict human responses to market events and act accordingly. Just wondered what would happen if they dominate a market such that human influence is negligible. So yeah, interesting question.

tzs• 15 years ago

My suspicion (which I can't prove--this is just a gut feeling) is that there is an economically correct price for any given thing, and that markets will move toward that price. This economically correct price only changes when factors in the "real world" change, or we have reason to believe factors in the real world are going to change (e.g., bad weather might reduce crop yield, or forecasts of bad weather make is expect a reduction in yield).

Actors in the markets get information not only from real world sources (e.g., news reports), but also infer information from the activity of other actors in the market, so there is a bit of a feedback look in the market.

My suspicion is that as you increase the frequency of trades, starting from very infrequent (e.g., people trading in person directly with the person they are buying or selling from) and then going to faster and faster methods (trades by mail, then telegraph, and so on), there are two effects. First, the market is able to more quickly converge to near the "correct" price for the item, and there is some increase in fluctuation around the correct price due to strengthening of the feedback loops.

I suspect that there is some optimum trading speed, which depends on the rate that the real world events (things like weather changes, fashion, wars, and so on) happen, and when you push trading speed past that you stop gaining on convergence speed, but continue increasing instability due to the feedback loops.

The result is a market that is less and less tied to the real world. In effect, the market ends up making up information from the trading activity itself. The trading essentially ends up being based on noise rather than signal. It's hard to see how that can be good.

MKT8• 15 years ago

trading activity is information because it is real people putting real money at risk and expressing their views of what the assets are worth. As in any competitive market, HFT traders cannot make money if they only trade with themselves - that is a mean zero proposition. But by trading with people who price the assets incorrectly at a point in time, they help move asset prices to their "correct " levels

pnathan• 15 years ago

All I read was "Oh noes, the computer, we don't understand it".

I would suggest that the people involved take the time to understand and learn the new branch of their art, instead of calling it "unholy", as if was some evil device by the antagonist of $religion.

known• 15 years ago

HFT = https://secure.wikimedia.org/wikipedia/en/wiki/Algorithmic_t... + https://secure.wikimedia.org/wikipedia/en/wiki/Front_running

Front running is illegal.

sireat• 15 years ago

I keep saying that one of the biggest problems with HFT is the false illussion of at will liquidity.

This is what happened at the "flash crash", many traders providing liquidity, which included most of HFT scene getting out of market, because they (and their algorithms) decided it was not worth the risk.

Old market makers did not operate like this, they were providing quotes even in a very volatile markets. Of course, many lost their shirts doing so, but were obliged by the exchanges to provide this service.

If none of the liquidity providers have an obligation, then we have no liquidity in volatile times, when we need it the most.

MKT8• 15 years ago

yes but if there is an obligation, you could end up with less total liquidity because if you oblige traders to trade when it is a losing proposition to do so, you will get less traders and less liquidity all the time, including volatile times. That's why exchanges actually pay traders to provide liquidity and charge liquidity takers. Imagine if you ordered convenience stores to sell twinkies to people even if they have no money. How would that work in practice ?

Clamping Down on High-Speed Stock Trades: US, Canada, European regulators

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