It’s obvious while the market is 'free" (of regulation) it’s a scam, pure and simple. Many people are invested here personally or thru their pension plans, etc, and we’re all at the tender mercies of these guys.
It’s been suggested that the smart money be moved to local banks. I don’t see an alternative.
If a stock is trading at 100, and an ordinary investor puts in an order to buy some at 102, presumably a high-frequency trader could get in, buy at 101, and sell at 102. That means that the person selling the stock gets only 101 instead of 102 for the stock. If the high-frequency traders are making money, it must come from somewhere.
From what the NYT story said, it appears that these traders a getting a tiny slice of the upward movement in a stock’s price because they can successfully anticipate about how big the move will be. In doing so, they are depriving sellers of a small piece of their profits, while the buyers are probably paying what they were already willing to pay. For small investors on both sides of the transactions, it doesn’t seem like a big deal.
What does seem like a big deal to me is the apparent fact that these traders are seeing orders from small investors before the market at large sees them, and are paying a fee for that privilege. Whether it costs small investors significant money or not, that is just wrong.
According to the article in the OP, these high frequency traders “often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.”
Now, personally, I wouldn’t have a problem a problem with high frequency trading if I could do it too (e.g. Everyone having the opportunity to purchase securities without a for-profit broker or a brokerage service).
To be clear, it’s not a scam in the sense of being illegal, but IMV it’s essentially electronic front-running*, for this reason:
While it might not be exactly the same in that the traders concerned may be acting for their own accounts rather than on behalf of customers, I think that’s splitting hairs. As noted by the Times,
Computers are plenty quick enough now to execute buy or sell orders in the fraction of a second between the time that a third-party order is shown to high-speed traders and the time that it’s shown to the rest of the market. In other words, these guys are able to trade on information that isn’t available to everyone. Hardly the type of thing to be encouraged, IMV.
*Front-running is when a stockbroker buys or sells shares for his own account, based on knowledge of orders placed by customers, before executing the customer orders.
From what the NYT story said, it appears that these traders a getting a tiny slice of the upward movement in a stock’s price because they can successfully anticipate about how big the move will be. In doing so, they are depriving sellers of a small piece of their profits, while the buyers are probably paying what they were already willing to pay. For small investors on both sides of the transactions, it doesn’t seem like a big deal.
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If a stock is offered at $20.00, but you are willing to pay as high as $21.00 are you depriving the seller at $20.00 of $1.00?
They aren’t seeing orders. They are attempting to predict where the market is going based on previously executed orders.
This is the type of stuff I frequently see when HFT is discussed. I trade stocks for a living and compete every single day against HFT algorithms. I have absolutely no idea what they are referring to in this quote. What are these loopholes? How does flashing a sizable order bully another investor into giving up profits? If no one knows they were there, how do they conclude they had an effect? That doesn’t even make sense.
You can do it. You’d just have to pay for the software, hardware, data fees, network connections, professional IT staff, etc. Why wouldn’t there be a barrier to entry to the trading business, just like every other business?
These traders are able to see upward movements fractions of a second before the market. They purchase at the current market price and sell at the uptick price. The small seller could have received the uptick price if the arbitragers had not been involved.
A HFT firm sees orders being transacted on the $10.00 bid in stock XYZ on the New York Stock Exchange. For each 100 shares the aggressive seller trades on the NYSE, he pays $0.0018. The HFT algo is programmed to join the bid and provide liquidity (willingness to buy) for $10.00 on a different ECN with a slightly different pricing structure. The HFT opts to bid on the Direct Edge EDGA network which will provide the aggressive seller an alternative, lower cost source of liquidity ($0.0002). Being a rational participant, the seller will opt to sell his stock on EDGA to the HFT firm. Once the aggressive seller has completed his order, the stock will begin to recover. The HFT trader will then get rid of his directional stock exposure by placing limit orders at, or above, $10.00 in an attempt further collect a liquidity providing rebate from the exchanges and/or profiting from the NBBO spread.
The world of stock trading is high-action, fast, and energetic, fortunes are made and lost every few moments. And that’s the problem.
What its supposed to be about is investment. You invest in a company, they invest in improvements and equipment to better their competitive advantage, so on and so forth. What this market is about is speculation, and it has been our ruin over and over and over. People are speculating on the value of the stock itself, not the company behind it.
“Amalgamated Widgets is going to go up five points tomorrow, buy a buttload now!”
“What do they make, widgets?”
“Who gives a fuck, chump! Be there or be square! Shall I put you down for five thousand shares?”
Its stupid, and everybody knows it. The solution is breathtakingly simple, which is part of why it can’t be allowed to happen. Adjust tax laws, whatever it takes, to make stock purchase an investment rather than a speculation. I grieve, of course, that this will put many, many stock professionals out of work, but there are many opportunities opening in bicycle messengers and baristas.
It seems immoral, and hurts the little guy (even if only a little bit), but those are not the big problems.
Traditional speculaters perform a public service by improving market pricing, e.g. by using their collective wisdom to predict future commodity prices. Hypermodern hyperefficient speculaters simply do not perform a similar public service. They predict the 2:03 price at 2:02 (or perhaps even 2:02 and 59 seconds in the latest hypermodern versions). Where’s the pricing service? They aren’t even responding to tangible data; so much of modern trading volume is computer-driven it’s just computer programs reacting to other computer programs with “fundamentals” almost irrelevant!
HFT could be viewed as just “a way for boys to have fun” except that I suspect there are real dangers. I’m not sure which danger will bite, but a computer failure or credit crisis could lead to calamity. Risk of calamity for a peculiar niche with no discernable macroeconomic value? No thanks.
What’s sad is that the 2007-2008 crisis, with its huge still-unknown cost to taxpayers, held important general lessons about such “hyperefficiency” … but which have been almost completely ignored.
What is interesting, elucidator, is that investing in growth is still a viable investment strategy, and it is one that is really not affected by speculators all that much. At the high end, Warren Buffett is a famous example. He analyzes, buys and holds. Many small investors do the same thing, and do well at it. Traders, particularly high-speed types like those described in the NYT story, are profiting from small movements in prices that have a tiny impact on many small trades. It’s worth doing to them because the volume of their trades and the short duration of their positions amplifies tiny slices of money into big bucks. For the small investor (or even Warren Buffett) who might lose a fraction to an arbitrager, the overall impact is negligible.
Are you seriously suggesting the speculation in stocks had anything to do with the financial crisis? :smack:
The stock market performed absolutely spectacularly during the financial crisis. The market was active and liquid throughout the entire down move. There is no rule that stocks have to always go up.
What’s the difference between investment and speculation? Is holding for 10 years OK? 5 years? 1 year? Who decides? If you have a retirement account, who do you think you bought your stock from?
The old “Grab the pitchforks, Lou, I done saw a spek-a-lator” point of view is cute, though.