Why not just cap the frequency? Only allow selling after X days/weeks/months of ownership.
No.
This is an interesting issue. I can comprehend the view that having super liquid markets on microsecond timescales seems unnecessary. But, in what way are less liquid markets with larger price differences between trades better? It used to take days to execute a stock transaction. Then the telegraph came along, then phone lines to the trading pits, then electronic trading. Each of these lowered the transaction costs of the individual investor. Up until very recently US stocks traded in 1/8ths of a dollar. Now the bid/ask spread in most S&P 500 stocks in a few pennies. In some stocks, the functional bid/ask spread is less than a penny. These changes have made an individual’s access to the stock market much, much cheaper than it ever has been.
What were the lessons and how do they relate to high-frequency stock trading?
We might agree that “little guys” are usually best off holding stock for a while, not indulging in high-turnover trades. Losing an 1/8 dollar is irrelevant if you hold the stock for years. (And do let’s agree holding stock is not farfetched; that’s how Warren Buffet plays and wins.) It would be interesting to see a table or graph showing “average length of time stock is held”, year-by-year over the history of the stock market. (Easy data to generate I suppose; just start by dividing total market cap by daily volume in dollars.)
I’d be delighted to see a government tax on every stock trade, perhaps 0.05%. Yes, I know I’ll be in a minority here on this. :rolleyes:
The credit crisis was provoked by “credit swap” derivatives trading which had grown to absurd levels. The total “nominal value” of such derivatives was in the tens of trillions of dollars! This sounds so absurd I’ll quote Wikipedia:
In normal credit hedging a bondholder might insure part of his potential losses, but the frantic swap market of 2007 was just a casino, in which smart banks bet big money to hedge bonds they didn’t even own! (AIG was one of the big “casinos” and, as we now know, played a “Heads we win, tails the taxpayer loses” game.)
My point is that such casinos did not play a public service, unless fleecing naive retirees to enrich young investment bankers is a public service. I think of this as an example of “hyperefficiency” which serves minimal macroeconomic purpose. The slicing and dicing of mortgage papers would be another example: manufacturing AA-rated instruments from A-rated instruments while drastically complicating the practical problems of mortgagees.
The stock bubble of 1999 would be a good example of the harm caused when stock trading is not based on fundamentals. With high-speed trading, a huge volume of stock will pass through a hyper-efficient structure with no regard for fundamentals (even though the turnaround might be measured in milliseconds!) Do I know exactly what will go wrong? No. Does my intuition tell me it’s more of the same foolishness? Yes.
Oh, I definitely agree that the little guy is best of holding stock for awhile (think decades). I don’t even think it’s wise for the average person to hold individual stocks. I personally own a diversified portfolio of index funds.
This is known as a Tobin Tax. It’s been tried before and hasn’t worked. Markets simply pass costs on to investors by widening spreads to account for the increased tax burden. Or trading simply moves to a different country.
I totally agree that the unregulated derivatives markets were (and still are) a huge problem. But, those markets are most definitely not “high frequency.” Much of that takes place over the counter, person to person. I think there’s a very strong argument that much financial “innovation” is a bunch of worthless garbage, but that’s a different discussion.
High frequency trading, as it exists today, did not exist in 1999. The NASDAQ bubble wasn’t cause by computer algorithms gone awry. It was caused by people making decisions and thinking, “it’s different this time.”
I believe that this is what septimus is saying. I don’t think he is saying it is the same situation, only that we don’t yet know what may go wrong. You can’t hedge risks you are unaware of.
A moment ago you were talking of the little guys’ savings from penny price advantages. 
Of course the tax is born by the investors! The “move to a different country” argument applies to many things needed in this global economy but that’s no reason to give up! Au contraire, if the U.S.A. had the will, so probably would the rest of the world.
So you agree that “much financial innovation is garbage” but think “HFT may be different this time!” :dubious: You argue that the credit swaps were not “high frequency” as though “high frequency” is good! My intuition tells me it only exacerbates the kind of problems you seem to agree exist.
BTW, I didn’t claim 1999 bubble was related to computer algorithms. I wrote “good example of the harm caused when stock trading is not based on fundamentals.” If I were capable of producing a thorough analysis of exactly how HFT may fail, I could get rich by playing VIX derivatives correctly. I simply claim that if trading based not on fundamentals is a problem, then high-speed trading based not on fundamentals is, if anything a bigger problem.
Hope this helps. 
Is this necessarily a bad thing? “Trading” is not the same thing as “investing”. Traders make short term transactions in order to take advantage of fluctuations in the market with little regard for the instruments they trade (stocks, bonds, currency, CDOs, orange juice, whatever). Investors put money into things they think will be worth significantly more money in the future. I don’t see how this affects your stock investments and 401k.
It seems to me that high-frequency trades would help to make markets more efficient since you are taking humans out of the picture. So the day-trader at home on his PC can’t compete with Goldman Sachs and their automatic trading system. Maybe he shouldn’t be trading in the first place.
The issues with HFT are that they make the playing field uneven. The markets, in theory, should be a level playing field for all comers. HFT though tilts things in some few’s favor where no one else can compete. Particularly when you consider things like co-location these guys get a literal advantage that others simply cannot access. Further, Reuters (at least) provides a data feed (for a fee) that is high speed and makes sure these guys get news before anyone else does.
Yes, you could buy all this stuff too but it is hideously expensive (millions of dollars a year) so most people simply cannot compete.
Now add in things like Dark Pools. Basically the trades are hidden from the market. This is a lack of transparency in the market which, to my mind, is exactly the last thing you want in a market (of course it is great for some which is why they thrive).
Where is the oversight for all this stuff? The people running the Dark Pools have enormous power. Can anyone say if they are playing by the rules? I doubt it because no one knows and there is no way to know.
Also, considering the program trading caused crash in 1987 I have to wonder if such a thing could loom in the future. The speed and data throughput and total trades executed now are waaaay in excess of what they were in 1987. The proprietary algorithms are closely guarded secrets so no one can say if something could happen to cause them to all dump on the market.
No. I’d like to be able to do the following:
- Be able to purchase stocks on the NYSE via the website.
- Be able to sell stocks on the NYSE via the website.
- Be able to purchase and sell stocks at face value without (or with minimal) transaction fees.
I essentially want to be able to play the stock market with the same flexibility as the traders. Being able to purchase stocks and immediately sell (in millisecond intervals, no less) them without having to pay transaction fees is sweet. It’d be like pulling a slot machine but and having opportunity to reinsert your quarter if you lose. Traders shouldn’t be the only people who get to eat at the trough of high-frequency trading. Everyone should be able to participate freely and fully without restriction. I have money and an Internet connection: Let me play, too.
- Honesty
What’s confusing? Even if you only make a couple trades a year, it is advantageous for you to pay as little in transaction costs as possible.
Eh, I’ll go with the evidence and what has happened when this has been tried in the past. You can judge by whatever you want, I guess.
My point was that CDS trading has nothing at all to do with high frequency stock trading.
And why is trading on fundamentals any different? Which of the many different fundamental models should we play by? Plenty of fundamentals based funds have blown up.
A speculator, whether it’s Warren Buffett or a HFT firm scalping for $0.10, is putting money at risk with the hopes of making a profit. The reason why they think that buying at $10.00 is a good idea isn’t important. If their reasoning is stupid, they go out of business. Well, unless you’re backstopped by the US government…
Thanks for your responses so far.
Especially, Trom, our local shark/pirate-at-heart for giving me an up-close look at the triumph? of reason over logic.
T evidently makes a livin’ skimmin’ and doesn’t mind giving a pt or two the company trawlers. He’s well above the sump in our trickle-down world and every bit as reasonable as Jesse James. That ain’t gonna change so drop it, mister. 
Back to the OP. Has no one watched the video and checked out Quants?
[emphasis mine]
And here we are with the guys who brought down the shit and we “socialized” back into existence still running the show.
Does anyone have a better idea than moving our assets to local banks and “settling for” 5%/year, compounded quarterly. Fuck! At that rate, I might even open a savings account.
- No one can do this.
- No one can do this.
- No one can do this. Everyone, even Goldman Sachs pays transaction fees. How do you think exchanges make money?
I’d like to be able to buy oatmeal at the same price as Cargill. I can’t because I don’t buy it by the train car. If you started trading millions of shares each day, I’m sure the NYSE would offer you a volume discount.
But, even as it is now, you can trade stocks for almost free.
:sigh:
Everyone and their pet salamander knows over-leveraged institutions were one of the main causes of the financial meltdown.
In your quote above they are referring to long/short funds that had large positions in many of the same stocks. When the ball started rolling downhill and the margin calls started coming, they all rushed to get out at the same time. Plenty of them were based on fundamental models of relative performance of, for example, Apple vs. IBM.
What does this have to do with high frequency trading?
By the way, I’ve already moved all my money from the Too Big to Fail banks. 5% a year? Risk free?! Where do sign up?
Precisely. What I’m suggesting is (a) forcing (for lack of a better term) the NYSE to allow individual persons to purchase, sell, and short shares without restriction through (b) a common interface that provides real-time ticks for tradable securities using an Internet connection. This is certainly possible. Securities like bonds and bills can be purchased through Treasury.gov with just a social security number, a bank account, and proof of residency. There’s no charge to buy or sell bonds/bills either. I’d like to see something similar with NYSE. I don’t object to Goldman Sachs being able to do what they do; I just want an evening of the playing field so that everyone else can have a pie slice, too.
State of California municipal bonds?
What is your take on Dark Pools Trom?
And for securities that do not trade on the NYSE?
Regardless, the stock exchanges (not just the NYSE) work because they are an exchange - they link buyers and sellers. The exchanges in no way keep you from getting your pie slice currently.
When you buy a treasury security, you can buy from a broker or directly from the US gov’t, because they are nice that way. However, if you want to buy Ford (F), you don’t have the option of buying from Ford HQ. You have to find someone willing to sell F. That is what the NYSE provides - it doesn’t buy your shares or sell them to you, or to anybody - including Goldman, JP Morgan, etc.
Why should the NYSE be forced to do anything? They are a for-profit corporation. There’s a mighty big difference between the US Government and the NYSE.
Do you feel the same way about eBay and demand eBay provide its services as an exchange for free? eBay would be gone overnight.
With certain qualifications, I don’t care for them.
There has always been an element of off-exchange block trading (10,000+ shares). If the market becomes aware of a large buying/selling presence, the market will start to move adversely against that interest. There is nothing wrong with that. That’s price discovery. A good block trader is paid to make large block trades with minimum market impact… Dark pools were created as an alternative to getting on the phone and making calls to other block traders, which could lead to information leakage. Dark pools provide for a way for block traders to anonymously probe for large trading interest without tipping their hand to everyone. Dark pools that are used for legitimate block trades, I think are useful and really not that bad for the marketplace. The block trading market has always operated outside of the retail investor, and I don’t think trading blocks in dark pools is a problem.
What I dislike about them is the fact that they frequently trade in much smaller sizes while using the lit markets as a benchmark for where the market is. It is my opinion that the lit markets, which are transparent, should be protected. By this I mean that before dark pools trade smaller lots, they should have to check and see if there is sufficient size in the public markets, before making the trade off exchange. The way it is now, a retail investor could have an order to sell 100 shares at $10.00 resting first in line in the NYSE limit order book. There might be a dark pool that has been executing small trades (100-300 shares) at offer price every 15 seconds for the past 30 minutes. It is possible that the pool could use that retail order as a benchmark and make 20 small lot trades without ever taking the lit market order. That doesn’t seem right to me. It seems like a two-tiered marketplace with limited access for the little guy.