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Barbarians At the Gateways

Soulskill posted about a year ago | from the our-stock-economy-is-stupid dept.

Businesses 321

CowboyRobot writes "Former high-frequency trader Jacob Loveless gives an in-depth description of the math and technology involved in HFT. From the article: 'The first step in HFT is to place the systems where the exchanges are. Light passing through fiber takes 49 microseconds to travel 10,000 meters, and that's all the time available in many cases. In New York, there are at least six data centers you need to collocate in to be competitive in equities. In other assets (foreign exchange, for example), you need only one or two in New York, but you also need one in London and probably one in Chicago. The problem of collocation seems straightforward: 1. Contact data center. 2. Negotiate contract. 3. Profit. The details, however, are where the first systems problem arises. The real estate is extremely expensive, and the cost of power is an ever-crushing force on the bottom line. A 17.3-kilowatt cabinet will run $14,000 per month. Assuming a modest HFT draw of 750 watts per server, 17 kilowatts can be taken by 23 servers. It's also important to ensure you get the right collocation. In many markets, the length of the cable within the same building is a competitive advantage. Some facilities such as the Mahwah, New Jersey, NYSE (New York Stock Exchange) data center have rolls of fiber so that every cage has exactly the same length of fiber running to the exchange cages.'"

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I may be in favor of fewer laws that restrict citi (2, Funny)

Anonymous Coward | about a year ago | (#45166019)

But writing an article on a topic this boring and tricking me into reading it by sneaking in the word "barbarians" should be a crime.

Very informative, enjoyed it a lot.

Re:I may be in favor of fewer laws that restrict c (1)

gabereiser (1662967) | about a year ago | (#45166573)

Barbarians = One who would argue the length of a fiber connection to his server costed him $X in lost profits from HFT.

Liquidity (5, Insightful)

Anonymous Coward | about a year ago | (#45166071)

Please, I just pray nobody justifies this obvious non-productive activity by explaining it lends necessary liquidity to the markets. The markets were liquid enough for me back when telegraphs were used to send messages to human traders.

Re:Liquidity (3, Funny)

JustOK (667959) | about a year ago | (#45166173)

The signal was taking too long to cross your lawn. So we foreclosed your house. Bye.

Re:Liquidity (2, Informative)

Anonymous Coward | about a year ago | (#45166397)

The markets also used to have 12.5 cent spreads. The insiders still made gobs of money, there was just less competition between them. You had to have a seat at NYSE to be an insider, instead of buy some fast computers. Plus HFT profits are cratering (see Getco's financials) so in part thanks to competition between HFT firms they may have priced themselves out of the market. Even if they are profitable, they are hardly printing money. So if everything is so unfair and they could do half of what people say they can do, why aren't they making money now?

Re:Liquidity (0)

kajsocc (2955535) | about a year ago | (#45167033)

The markets were liquid enough for me

And I suppose you are the only person to whom people should be catering...?

Re:Liquidity (2)

Pino Grigio (2232472) | about a year ago | (#45167185)

It isn't non-productive. It optimises the buy/sell price of various things. In markets where this kind of trading happens, sell prices are maximised and buy prices are minimised.

What purpose does HFT serve? (5, Insightful)

Opportunist (166417) | about a year ago | (#45166087)

Please enlighten me, dear wizards of the wall street. Please teach me what purpose HFT serves to our economy.

Somehow, to me this just looks like it is the most blatant proof that the whole stock trade has become a self serving gambling place without any connection to reality and economy anymore. It used to serve the purpose of accumulating money for projects larger than what any single person or even government could finance. Today, it is just a self serving leech on our economy.

Re:What purpose does HFT serve? (5, Informative)

Impy the Impiuos Imp (442658) | about a year ago | (#45166163)

This isn't even gambling. It's pseudo-precognition, taking advantage of price differentials between computers in different cities or buildings, before the other guy's system promulgates the updated price.

Re:What purpose does HFT serve? (5, Interesting)

Anonymous Coward | about a year ago | (#45166395)

It's a technical form of arbitrage, which is not illegal and may improve market liquidity. I think the downside is that trades are made on the basis of inferred choices and this distorts the real market influence of "People who invest" versus "Machines that exploit market mechanics." The former requires contextual analysis and the ability to evaluate products, management teams, etc. The latter is a numbers game of pre-destined metric comparison, equivalent to banal tasks such as gold farming in an MMORPG.

Re:What purpose does HFT serve? (3, Insightful)

Opportunist (166417) | about a year ago | (#45167023)

Just because something is legal doesn't mean it's right. 400 years ago it was legal to burn women as witches. And just 50 years ago it was legal to kick a black guy out of a bus for sitting on the wrong seat.

And since laws are made by those that have the money, take a wild guess who laws benefit.

Re:What purpose does HFT serve? (0)

Anonymous Coward | about a year ago | (#45166175)

You were looking for social market-altruism from singly profit-motivated Gordon Gecko types, then?

The idea is personal profit. They've rationalized that to be worth potentially destroying the worldwide monetary system.

And if you think this is dangerous or foolhardy, well... you must be a freemarket hating COMMUNIST! GET HIM!

Re:What purpose does HFT serve? (3, Insightful)

Opportunist (166417) | about a year ago | (#45167097)

Erh... that was the original idea of stock companies. You can't afford to build $huge_project, I can't and there's nobody who can. Hell, even we together cannot. But if we can find a few hundred or a few thousand people who're willing to invest a few bucks, we can pull it off. And everyone owns (and controls) as much of the company as his shares say.

If this ingenious pinnacle of capitalist ideal, a joint ownership of an enterprise dependent on your invested capital, is now considered communism, the system sure as hell needs a lot of repairs!

Re:What purpose does HFT serve? (5, Insightful)

mythosaz (572040) | about a year ago | (#45166191)

I'm obviously a rube with regards to how the magic happens beyond "Strike first, strike fast, strike often!" but it's pretty fucking clear to everyone that Average Joe doesn't benefit one bit from this unless he's bought stock in SuperHFT TradeCo.

Nobody benefits from this except 1/100th of 1%'ers trying to move into the 1/1000th of 1%'ers at the sake of making sure that you or I can't possibly play, because the playing field is so un-level it's a miracle we don't slide right off it... ...after leaving our wallets.

Re:What purpose does HFT serve? (0)

Opportunist (166417) | about a year ago | (#45167129)

Then why the fuck is this legal? How can a democratic system allow something like this to exist?

And don't give me the bull about "but the US is a republic" now. "By the people, for the people", rings a bell?

Re:What purpose does HFT serve? (4, Informative)

Ubi_NL (313657) | about a year ago | (#45166261)

The Zeconomist has a debate about it

http://www.economist.com/debate/days/view/816 [economist.com]

Re:What purpose does HFT serve? (3, Informative)

smaddox (928261) | about a year ago | (#45167075)

Interesting debate, I'll have to finish reading it at some point.

After reading the opening statements, it seems to me that the pro-HFT guy, Jim Overdahl, is confusing the use of computer automation to reduce transaction costs (which benefits the whole market) with HFT firms that act only as middle men (which benefits only the HFT firms). I didn't realize people could get caught up on such a simple point, but perhaps this is the only way someone could think that HFT is actually a Good Thing.

Of course computer automation lowers transaction costs, and of course that's a good thing. Adding a minimum hold time, or taxing very short term holds wouldn't eliminate that benefit, though. It would only eliminate the middle men.

Re:What purpose does HFT serve? (2)

gmuslera (3436) | about a year ago | (#45166287)

Didn't got the memo? Life, love, having a future, those pesky humans that ask for their rights, health, etc have the lowest priority. What really matters is money, making it as fast as possible, is like checkmating the other king in chess, no matter how much pawns or higher pieces you must sacrify for that. HFT, as a refinement for reaching that ultimate goal, is great for that. Even if things screws up badly and big banks behind it gets hit, they will be bailed out, is a no risk bet. And while money keeps being the ultimate good, that kind of tools will still be around.

Re:What purpose does HFT serve? (5, Informative)

ShanghaiBill (739463) | about a year ago | (#45166299)

Please teach me what purpose HFT serves to our economy.

This question has been beaten to death every time a HFT related article is posted. But people still ask, so I will try to answer. High Frequency Traders (HFTs) are not investors, they are market makers. They find a willing buyer and a willing seller, arrange the transaction, and execute the trade. They make a profit on the spread between the buy price and the sell price. The problem is that once they locate the buyer and seller, they need to buy the stock from the seller first, then turn around and sell it to the buyer, but the buyer may have cancelled they transaction, or they may have already bought the stock from someone else, in which case the HFT is stuck with the stock and may have to sell it to someone else at a loss. If transactions are granulated to one second intervals, instead of say, millisecond intervals, then the risk of this happening is a thousand times higher , and the HFTs will insist on higher spreads, resulting in lower liquidity and higher transaction costs for both buyer and seller.

Since the introduction of high frequency trading, transaction costs have fallen considerably, saving plenty of people a lot of money. The only losers are the old market makers that used to have lucrative sweetheart deals with the exchanges. Many of those old market makers are now bankrupt. Good riddance.

Re:What purpose does HFT serve? (1)

Anonymous Coward | about a year ago | (#45166411)

Since the introduction of high frequency trading, transaction costs have fallen considerably

I'm afraid I'll have to call you on that. Transaction costs have been falling considerably for decades- how do you know HFT is responsible for any of that?

Re:What purpose does HFT serve? (1)

Anonymous Coward | about a year ago | (#45166445)

The real question is whether the hidden costs in increased, episodic volatility is worth the benefit. Probably, of course, especially if we put in place safeguards. Remember, each HFT isn't trying to be a market maker; they're trying to game the system. It's only in the aggregate that HFTs help to reduce spreads. But their collective behavior induces other phenomenon, as well; and that's the stuff we should be worried about.

Also, you're never going to convince laymen to not be disgusted by HFTs. The little people live their lives by a small handful of metaphors. They think government should operate like a business, or a household. Bankers are supposed to be trusted accountants who get paid for holding your money. Etc.

Re:What purpose does HFT serve? (3, Insightful)

Prune (557140) | about a year ago | (#45166589)

>The little people live their lives by a small handful of metaphors.

Your post is otherwise insightful, but the derision expressed by that statement counteracts the value you've brought to the discussion. As for your comment on bankers: holding your money is indeed half of the job of retail bankers (the other half being to lend to loan-worthy borrowers, which includes the oft-neglected part of actually determining who is loan-worthy). I'm pretty sure laymen have no issue distinguishing between retail and investment banking.

Re:What purpose does HFT serve? (1)

Microlith (54737) | about a year ago | (#45166457)

And in exchange for this liquidity, we get flash crashes and Goldman Sachs going "oops, that was a mistake. NYSE, please unroll the last thousand trades that resulted in us taking losses."

Re:What purpose does HFT serve? (2, Informative)

ShanghaiBill (739463) | about a year ago | (#45166659)

And in exchange for this liquidity, we get flash crashes

The flash crash was not caused by HFT. In fact, the SEC investigation determined that most active HFTers were trading against the decline, thus making the crash less severe. One of the SEC recommendations was to find a way to keep more HFTers active during big swings because they help to keep the markets stable.

Re:What purpose does HFT serve? (0)

Anonymous Coward | about a year ago | (#45166485)

I think you missed this step:

Get your computers to fire off fake bid and ask quotes all the time to see how that changes others' quotes, in anticipation that they might show how bad they want to buy or sell, and when you get to a place where you can fire trades to buy and sell, almost simultaneously, buy and sell or sell and buy however many shares you can to lock in a profit, no matter how small.

Re:What purpose does HFT serve? (5, Informative)

Anonymous Coward | about a year ago | (#45166535)

Please teach me what purpose HFT serves to our economy.

... they are market makers. They find a willing buyer and a willing seller, arrange the transaction, and execute the trade.

Umm, bullshit. The exchange is supposed to match up buyers and sellers. That's what exchanges are FOR. If there is a buyer but no seller, then the market maker steps in and sells at a higher price. If there is no buyer, the market maker buys at a lower price. This is how price movements happen. HFT is a middleman. If there is no buyer or seller, then HFT wouldn't go in on the trade at all. If there is a buyer and a seller, HFT does not need to exist, since the exchange is supposed to match up the two parties already.

Re:What purpose does HFT serve? (2, Informative)

ShanghaiBill (739463) | about a year ago | (#45166769)

Umm, bullshit. The exchange is supposed to match up buyers and sellers. That's what exchanges are FOR.

The exchanges are made up of their members. The members are brokerages that execute trades on behalf of their clients. You, as an individual, cannot log into the NYSE computer and execute your trade anymore than you could have walked into the pit during the old paper-based days. So why can't you trade with a "member" instead of a HFTer? Because the members are the HFTers. For all practical purposes, the HFTers are the exchange.

Re:What purpose does HFT serve? (2, Insightful)

Anonymous Coward | about a year ago | (#45167079)

You make no sense. Sure, I have to go through a brokerage to make a trade on the NYSE. Where would that trade go if there were no HFTers? I bet it would go to another brokerage that was buying/selling, or to a market maker, which would move the price. What makes the HFTs necessary, other than their overwhelming presence in the trading volume by virtue of being there?

Re:What purpose does HFT serve? (2)

Sarten-X (1102295) | about a year ago | (#45166551)

An excellent explanation. The only thing I'll add is that also, these traders aren't even working in a single exchange. A buyer might make an offer in New York, and end up getting the security from a seller in Chicago. Instead of having a millisecond granularity, they're bound by the speed of light to having a bigger window (and bigger risk). That's why they're so interested in low-latency connections.

Re:What purpose does HFT serve? (0)

Anonymous Coward | about a year ago | (#45166557)

"..saving plenty of people a lot of money"

By plenty of people, I presume you mean billionaires and major corporations.

Re:What purpose does HFT serve? (0)

Anonymous Coward | about a year ago | (#45166579)

Your explanation makes sense. HFT is better than market makers. However, this doesn't explain the purpose of HFT in a "centralized order book" market model.

Re:What purpose does HFT serve? (1)

Anonymous Coward | about a year ago | (#45166763)

I think the other major point that you need to begin including in the statements in each of these articles is that the *actual worth* of having liquidity is the real, core argument. If trades incurred more of a cost or were made more difficult, the tendency to "invest smartly" in the same sense as bond purchases would be raised.

In other words, HFT's provide liquidity, but is the liquidity worthwhile? To whom is it 'worthwhile,' and is it a good thing for those to be rewarded? That will close out a rounded debate circle for people to talk about.

Re:What purpose does HFT serve? (1)

sadr (88903) | about a year ago | (#45166881)

High Frequency Traders (HFTs) are not investors, they are market makers. They find a willing buyer and a willing seller, arrange the transaction, and execute the trade. They make a profit on the spread between the buy price and the sell price.

Except that a neutral third party (the exchange) could connect the willing buyer and willing seller who both are willing to perform the transaction at higher prices, and split the difference. i.e. the Seller is selling for $1.05 and the buyer is willing to pay $1.06. HFT makes money by buying from the seller, selling to the buyer, and pocketing the $0.01 (minus expenses and trading costs.)

But wouldn't the buyer and seller be better off if the exchange, who is taking a transaction fee to perform the service, closed the transaction at $1.055? And if the buyer and seller are serious about wanting to make the trade, requiring the offer to be valid for a full second (for example) would give the market plenty of time to guarantee that the trade occurs.

Since the introduction of high frequency trading, transaction costs have fallen considerably, saving plenty of people a lot of money

It is not clear if this is a case of cause or effect. Without cheap transactions, HFT doesn't make sense. (And if the number of transactions were an order of magnitude smaller without the HFT noise, the cost of the infrastructure to execute the trades would be dramatically cheaper as well, which would reduce the cost of trades.)

But the fact remains that HFT acts as a hidden transaction fee on every trade. All of the money they make comes at the expense of someone executing an order.

Re:What purpose does HFT serve? (1)

Connie_Lingus (317691) | about a year ago | (#45166325)

oh this is an easy one...

HFT has only one purpose nowadays, to suck the $85bil USD in quantitative easing money (QE) that our federal government pumps into the market every month *out* of the market in light speed.

why do you think these guys are worrying about fucking cable lengths?

Re:What purpose does HFT serve? (1)

jeffmeden (135043) | about a year ago | (#45166635)

oh this is an easy one...

HFT has only one purpose nowadays, to suck the $85bil USD in quantitative easing money (QE) that our federal government pumps into the market every month *out* of the market in light speed.

why do you think these guys are worrying about fucking cable lengths?

Except its the FED (a collection of private banks) pumping the money in, and HFT (at other private banks) coming along to suck it out...

Re:What purpose does HFT serve? (0)

Anonymous Coward | about a year ago | (#45166423)

It wouldn't be so bad if they couldn't back out of "purchases" when things do go as expected.

Self-serving can be applied to the fact it's legal to "buy" non-existent commodities forcing artificial demand creating price rises, and then selling the stock long before said commodity is anywhere near being physical. Being allowed to manipulate the prices like this is why we're all getting poorer and the filthy rich, significantly richer.

Re:What purpose does HFT serve? (1)

Anonymous Coward | about a year ago | (#45166505)

Do you have some examples of backing out trades? As a good counter-point, look at Knight's mess in Aug 2012. They basically had to sell the company to a competitor to stay afloat, and on top of that the SEC just hit them with a fine.

Re:What purpose does HFT serve? (1)

green is the enemy (3021751) | about a year ago | (#45166475)

Others have already answered that most HFTs are just doing arbitrage and make the bit-ask spread low. However, reading some of the article, it saddens me that very talented PhDs are wasting their time playing mind games with each other. The are solving problems then they themselves are creating. I guess on the plus side we have some advancement of FPGA technology and real-time systems... Somehow this still seems like a net waste.

Re:What purpose does HFT serve? (0)

ShanghaiBill (739463) | about a year ago | (#45167061)

The are solving problems then they themselves are creating.

No. They are solving problems inherent in markets. By increasing transaction speed, they are reducing risk, resulting in lower transaction costs.

I guess on the plus side we have some advancement of FPGA technology and real-time systems... Somehow this still seems like a net waste.

Before HFT, spread were wide, and brokers owned big yachts. Today the old brokers are bankrupt, and instead most of the money goes to the investor, and some money goes into system research and salaries for the researchers. This is a big improvement. Most of the people wishing for the "good ole days" of the trading pits, are not old enough to actually remember them.

Re:What purpose does HFT serve? (0)

Anonymous Coward | about a year ago | (#45166491)

Liquidity to the markets!

Re:What purpose does HFT serve? (2, Insightful)

Anonymous Coward | about a year ago | (#45166509)

Of course it is not gambling -- it is a form of legalized front-running. This entire ecosystem of parasites could be trivially destroyed if regulators change the way market matches bids and asks -- for example by stipulating that trading needs to be done in round of 1 minute each -- first 50 seconds it accepts bids and asks, and last 10 -- matching them in fair manner (and splitting margins between participants). That is it -- in a blink of an eye all these smart men will be off doing smth actually productive.

Re:What purpose does HFT serve? (4, Informative)

kajsocc (2955535) | about a year ago | (#45166523)

Please teach me what purpose HFT serves to our economy.

The best analogy I've heard is to transportation / shipping. Back when such transport was new, people scoffed at the idea of making money for moving things around. "You aren't producing anything, making anything, it's a complete waste." But today, we can see how moving goods around is actually of extreme importance.

Trading moves another kind of economic good--capital. That is, trading is to capital as transportation is to physical goods.

High-frequency trading is just trading... but faster. You'll notice how the summary mentioned New York and London. This is because the HFTs are arbitraging between those two major exchanges. If they were slower, you'd have more people getting "incorrect" prices, in the sense that there was a better price in NY but the information hadn't been priced into the London exchange yet. Hence, London traders would be getting screwed out of better deals that they technically could have known about.

However, HFT has also become associated with a bunch of "dirty tricks", like flash trading, etc. These kinds of things actually CAN hurt investors and other traders. This gives HFT as a whole a bad name, as it is viewed negatively by those who feel they are taken advantage of by these tricks.

In general, though, HFT has lowered market spreads, meaning it costs less to trade. Those lower costs show up in investors' bottom lines, which obviously include retirement accounts, so a lot of people are helped by HFT. However, I think a lot of people believe that without HFT, money would simply not be "leeched out", because they view traders as middlemen who are price gouging. The problem with this view is that all trading requires either paying middlemen, paying the spread, or taking on risk like traders do. So, take out the middlemen and you'll just pay higher spreads or incur larger risks, both of which are real costs, economically-speaking.

Another thing is that if you check the trading volumes, you'll see that HFT makes up a substantial (50+%) of trading volume. People I've talked to often think this equates to 50% of the "profit" leeched by HFT. This is not so at all... the reason they have such high volumes is they'll buy and sell multiple things simultaneously, then trade back to a fully-hedged position moments later or at least by the end of the trading day. As an HFTer you might buy 100,000 contracts and sell them a bit later and net just $5-10 for the whole thing. Of course, there might be thousands of such opportunities in a given trading day, if you're a large firm with a competitive HFT program. As such, this type of trading incurs a very high volume-to-profit ratio. On top of that, a substantial portion of their would-be profits are eaten up by trading fees. And then, as the summary mentions, you've got substantial electricity costs, top-end hardware costs, collocation costs (which can be obscenely expensive for the prime real estate locations), etc., so it's not at all like HFT is making money hand over fist.

HFT was a big thing a few years ago because it was a new thing, there wasn't much competition, and the profits were fierce. Now it's just the competition that is fierce.

Re:What purpose does HFT serve? (1)

Anonymous Coward | about a year ago | (#45166621)

Please enlighten me, dear wizards of the wall street. Please teach me what purpose HFT serves to our economy.

Somehow, to me this just looks like it is the most blatant proof that the whole stock trade has become a self serving gambling place without any connection to reality and economy anymore. It used to serve the purpose of accumulating money for projects larger than what any single person or even government could finance. Today, it is just a self serving leech on our economy.

Who cares?
What purpose does Facebook serve to our economy. iPhones? How about expensive designer clothes? What purpose is there to giving massive loans to every american to buy a huge McMansion and 2.5 cars per person? How about expensive for-profit schools taking gov't backed loans and graduating (or not) zillions of people who have no marketable skills?

Perhaps you prefer a Central Command Economy where a Committee of Values decides what busines activity is worthy before it gets approved?

What ISN'T a self serving leech on our economy?

Re:What purpose does HFT serve? (1)

TheloniousToady (3343045) | about a year ago | (#45166817)

Like all forms of mechanical trading, it serves the useful purpose of distracting folks from Value Investing. Since Value Investing wouldn't work if all investors practiced it faithfully, all such distractions are a good thing for us Value Investors. I'm all in favor of it.

It's notable that none of the world's most successful investors use this trading technique or any other. See Warren Buffet's classic article The Superinvestors of Graham-and-Doddsville [columbia.edu] for details.

Re:What purpose does HFT serve? (1)

user317 (656027) | about a year ago | (#45166843)

> Somehow, to me this just looks like it is the most blatant proof that the whole stock trade has become a self serving gambling place without any connection to reality and economy anymore. It used to serve the purpose of accumulating money for projects larger than what any single person or even government could finance. Today, it is just a self serving leech on our economy.

It lowers the spreads and eliminates arbitrage, and that reduces transaction costs for every trade, which is a much much much larger volume than what HFTs take in. HFT's take a slice of any arbitrage opportunity available, so we see a price thats closer to the optimal. Arbitrage is bad, it means that there is a price difference between the same thing in two different markets, as in i just bought a tv at costco only to find it 20% less at walmart across the street. If we had HFT's for retail those price differences wouldn't exist and i could buy a product anywhere and know that i got the lowest price possible. The good thing is that there is nothing to worry about. HFTs compete to the death for every arbitrage opportunity, so they quickly disappear.

Re:What purpose does HFT serve? (1)

MrNJ (955045) | about a year ago | (#45166927)

1st, I am not a wizard of "the wall street" (sic). Although I did work at FINRA for awhile.

2nd, whether or not an activity serves our economy makes no difference to me. If the activity serves the people who participate in it, that's good enough reason for the activity to exist. If I don't approve of the equities markets, it's trivial for me to avoid it. Just don't invest. That's it.

Re:What purpose does HFT serve? (1)

tutufan (2857787) | about a year ago | (#45167085)

Without commenting on whether or not HFT is socially useful, I'll just point out that many (if not most) economic activities in the modern world have little obvious social value. I can assure you, however, that the direct customers/counterparts of HFTs very much want the service that HFTs provide. If they go dark for even a day, their customers get very, very unhappy. It's kind of like Facebook: Do we need it? Not really. Shall we shut them down? You first...

Easy solution for all their technical problems. (5, Insightful)

Anonymous Coward | about a year ago | (#45166089)

Make all offers valid for at minimum one second and poof 99% of high frequency "trading" vanishes.

Re:Easy solution for all their technical problems. (2, Interesting)

ShanghaiBill (739463) | about a year ago | (#45166147)

Make all offers valid for at minimum one second and poof 99% of high frequency "trading" vanishes.

... and transactions costs go up for everyone. Do you understand that the buy-sell spread has fallen dramatically since HFT became feasible?

Re:Easy solution for all their technical problems. (3, Insightful)

rickb928 (945187) | about a year ago | (#45166231)

"the buy-sell spread has fallen dramatically "

Is this good, and for whom?

Re:Easy solution for all their technical problems. (1)

Anonymous Coward | about a year ago | (#45166465)

Low buy-sell spread benefits anybody that buys stocks.

Re:Easy solution for all their technical problems. (3, Interesting)

edman007 (1097925) | about a year ago | (#45166803)

How much? As someone who invests for the long term, I really don't see large spreads affecting me. Right now, looking at google, I see a spread of 16 cents on a $1000/share stock. If I invest in that stock, I'd probably consider anything under 1% in gains a wash, so the spread would have to be over $10 to even factor into my decision making. I don't care if the spreads go up 10x, to $1.50 on that stock, it won't affect me, yes I'll lose that extra dollar or so, but I'm trading on double digit gains/losses, if I buy at $700 and sell at $1000 I don't care about that $1.50, it doesn't materially hurt me. All that HFT does it make the stocks react faster to the news, and the cost is that the HFT people get to suck money out of the market for nothing (though make it liquid I suppose), But is that something we really need? I don't need it that liquid for my investments, and the businesses don't either.

If it was up to me I'd change the stock exchanges to process one trade per account per stock per day, all at 4pm (meaning you got the whole day to enter your trades, speed won't have an effect at all).

Re:Easy solution for all their technical problems. (0)

Anonymous Coward | about a year ago | (#45166811)

Low buy-sell spread benefits anybody that buys stocks... ... at high frequency.

Hilarious.

If you buy stock to "invest," moderate fees and speed are irrelevant. If you buy to skim, day trade, or play games, then you lose. And I say, good riddance.

Re:Easy solution for all their technical problems. (1)

ShanghaiBill (739463) | about a year ago | (#45166873)

"the buy-sell spread has fallen dramatically "

Is this good, and for whom?

It is bad for brokerages, that now have lower profits. It is good for everyone that invests in stocks, either directly or indirectly, which includes nearly everyone with a pension fund or even an insurance policy.

Re:Easy solution for all their technical problems. (2)

bob_super (3391281) | about a year ago | (#45166277)

I'm ok with paying a little for the service of buying a stock.
That's how it was for a really long time, and was good enough to finance industrial revolutions and colonizing most the world.

What can't you do if you don't have quarter-cent microsecond trades?

Re:Easy solution for all their technical problems. (2, Informative)

ShanghaiBill (739463) | about a year ago | (#45166543)

I'm ok with paying a little for the service of buying a stock.

You can! There are plenty of brokers out there that would be happy to charge you extra. Or you could just flush your surplus money down the toilet for the same end effect.

What can't you do if you don't have quarter-cent microsecond trades?

Let's turn the question around: What do you hope to gain by passing yet more laws that prohibit consenting adults from engaging in transactions that you think should be banned because you don't understand them?

Re:Easy solution for all their technical problems. (2)

bob_super (3391281) | about a year ago | (#45166999)

"because you don't understand them"
Typical internet comment fallacy: I probably know it better than most around here, by virtue of having researched it extensively when I almost accepted a job at an HFT firm.

"passing yet more laws that prohibit consenting adults from engaging in transactions"
Did I state I want to pass any laws? Quarter-cent referred to the spread, since the topic was about reducing the spread for everyone.
Don't read what you want to read, read what I wrote.

The point, sir, is that in the initial setup of the stock exchange as a place to bet on future growth of various investments, the fees and spread were just the cost of doing business. You thought company X was going to double in value, you bought their stock and waited, or bought most of their stock, told them what to do, and waited. The initial cost of getting, and the cost of selling that stock, was annoying but the point was to get a decent ROI.
HFT is another great example of the here-and-now that poisons the economy and the workers (quarterly results, anyone?), by trying to grab profit in a transaction that would happen without you. The fact that massive investments happen shows that there is money to extract from someone on this transaction (HFT hardware builders, operators, banks), but in the end that money has to come from somewhere, and whoever is receiving it will do her best to make sure it keeps coming and growing. So HFT will mechanically translate into higher costs for someone, because someone else's shareholders need to be paid.
If you're inside the system and profit from it, great for you. If you're outside and your bank profits from it, maybe good for you. But if you need the services of whoever is on the losing side (which is pretty much anybody not playing), then it will be more expensive, because they have to compensate for that loss.

Re:Easy solution for all their technical problems. (1)

kajsocc (2955535) | about a year ago | (#45167121)

but in the end that money has to come from somewhere

Yeah, it does. With or without HFT. Can you see how increased competition to provide you better prices results in less money "having to come from somewhere" ?

Re:Easy solution for all their technical problems. (2)

radarskiy (2874255) | about a year ago | (#45167145)

"What do you hope to gain by passing yet more laws that prohibit consenting adults from engaging in transactions that you think should be banned"

Accounting of external costs, which is recognized as a proper role of regulation in a free market, since the effects of the transaction are provably not limited to just those who are "consenting" to it.

Why do you hate Adam Smith?

Re:Easy solution for all their technical problems. (1)

Anonymous Coward | about a year ago | (#45166373)

But you make no case that a reduced spread is good. Or, as would be important to me, that the reduced spread is good for the typical American.

One of the few ways I believe most Americans can productively invest is through direct stock purchase programs. You have little control over the transaction price (something like the weighted average price on the assigned trading day) but you avoid transaction fees being a relevant amount of your investment, and usually dividend reinvestment is fee-free or company-paid. In this case, the spread is completely irrelevant.

Re:Easy solution for all their technical problems. (1)

Anonymous Coward | about a year ago | (#45166425)

no the AC has a good point. The only reason HFT is so expensive is because machines need to be physically close to get their "bets" in first.

How about having a fixed time increment that transactions get signed with, and they are all treated as being coincident?

Hence, you may be 2000 miles from the centre but you can "sign" a transaction with a GPS clock key and they all get taken as "period N".

Either way, having a system based upon a central "golden machine" is just plain stupid. It may have made sense with people waving tickets, but it makes no sense in the world of computer transactions.

My $0.02 (adjusted for inflation...)

Re:Easy solution for all their technical problems. (0)

Anonymous Coward | about a year ago | (#45166171)

When "investment" is shorter than 1 quarter, add more taxes that are progressive higher as the time frame of "ownership" gets shorter.

Re:Easy solution for all their technical problems. (0)

bob_super (3391281) | about a year ago | (#45166295)

HOW DARE YOU TAX THE JOB CREATORS!!!!!
Is there a 72-point-sarcasm font on /. ?

Gross receipts tax (4, Interesting)

Overzeetop (214511) | about a year ago | (#45166301)

Forget "income" - change toa gross receipts tax. It only requires a couple percent (well, maybe up to 4) to have a sustainable tax base. You pay your real estate agent 6% to sell your house, you pay most brokers 2-4%, you should probably kick in a couple percent for the government defending that investment with nuclear weapons.

No deductions, no exclusions. Whatever you receive, you pay 3% to the feds. My town happens to have a GRT for business and it's quite difficult to dodge. It makes HFT and short term, high volume trades a losing proposition. It effectively punishes any entity - person or corporation - which does not add value to a transaction. And that, imho, would be a good thing.

Re:Gross receipts tax (2)

Nadaka (224565) | about a year ago | (#45166437)

I'm not sure the math on that will work out.

From the perspective of personal income, we need an average taxation rate of around 27% to balance the federal budget.

And what happens when you transfer money from one account to another? You "receive" the money, so does that mean you get taxed?

Re:Gross receipts tax (1)

Prune (557140) | about a year ago | (#45166693)

Not really. A large portion of the US debt is owed neither to foreign entities nor to members of the population, but is between treasury and Fed--it's an accounting fiction. It's about as meaningful as the deb between a husband and wife. It doesn't need to be repaid. This is a common confusion and another example of mixing up concepts from microeconomics with macroeconomics. http://bilbo.economicoutlook.net/blog/?p=11218 [economicoutlook.net]

Re:Gross receipts tax (1)

Nadaka (224565) | about a year ago | (#45167089)

Pretty sure you replied to the wrong post.

Re:Gross receipts tax (1)

udachny (2454394) | about a year ago | (#45166719)

The only thing you will achieve with that is a monopoly by one company over all of the transactions and loss of the rest of the market to other countries with less ridiculous laws.

Re:Easy solution for all their technical problems. (0)

Anonymous Coward | about a year ago | (#45166365)

Personally, I prefer the proposition of having all buys and sells accumulated throughout the day and then matched up with each other at the end of the day.

waste (0)

Anonymous Coward | about a year ago | (#45166103)

what a fucking waste of resources

Tax (0)

Anonymous Coward | about a year ago | (#45166133)

Salon must have known we'd be discussing this- they posted a story advocating a financial transaction tax:

http://www.salon.com/2013/10/18/the_tax_that_could_save_america_from_wall_street_partner/

Re:Tax (1)

mythosaz (572040) | about a year ago | (#45166203)

Your first trade once per second is free.

Re:Tax (1)

Overzeetop (214511) | about a year ago | (#45166337)

Every sale is a receipt transaction. Every receipt transaction pays a 3% tax.

Your capital gains in your retirement/savings account and your regular income get taxed at 3% instead of 10-15-20% or a marginal income rate. If you work for a living and invest as a long term play you pay very little taxes. You game the system and try and make money on the margins and through high volume and you face huge taxes.

fascinating tech (2)

trybywrench (584843) | about a year ago | (#45166157)

I find the technology behind HFT pretty fascinating, the level of optimization is impressive and right out there on the bleeding edge. IIRC there are switches being developed with trading algorithms right in the silicon. I just wished they had something to show for all that work. I'm perfectly ok with the levels of profit and gain but show me a widget or something of value that was produced from the labor. The usual answer you get from this question is liquidity and allocation of capital but if the inventors would be honest with themselves they would realize that's not the case. Trades happening at minute resolution by a human would provide the same level of capital allocation and liquidity as trades happening at the microsecond resolution by machines.

Re:fascinating tech (0)

Anonymous Coward | about a year ago | (#45166361)

IIRC there are switches being developed with trading algorithms right in the silicon [...]

show me a widget [...] that was produced from the labor

Well, a more sophisticated switch, duh!

Re:fascinating tech (1)

fermion (181285) | about a year ago | (#45166633)

This is the only justification. While HFT trading is basically profit for those who are fundamentally useless to the economy, basically a lesser modern form of arbitrage, the technology being developed may be beneficial. The question is if the technology development justifies the clear damage that HFT does. Some parasites, like the bacteria in our gut, are useful. Others, like meningitis, are not so much.

HFT seems to be the new Porn (0)

Anonymous Coward | about a year ago | (#45166213)

Large market share, pushing limits:

The reality is that automated trading is the new marketplace, accounting for an estimated 77 percent of the volume of transactions in the U.K. market and 73 percent in the U.S. market. As a community, it's starting to push the limits of physics. Today it is possible to buy a custom ASIC (application- specific integrated circuit) to parse market data and send executions in 740 nanoseconds

I would image it's about as useful to society too.

Uh (1, Interesting)

ShooterNeo (555040) | about a year ago | (#45166215)

Isn't HFT just insider trading?

Insider trading = making stock trades using information that has not yet been disseminated to the open market.

HFT trading = using mathematical algorithms to detect the reaction of the open market to information, and to get ahead of it to make advantageous trades before the entire market can react.

Re:Uh (1)

_UnderTow_ (86073) | about a year ago | (#45166283)

I'm not involved with HFT in any way, just playing Devil's Advocate.

Insider Trading == using material non-public information to your advantage when buying / selling securities.

If the information inputs to the HFT algorithms are puplic (not sure if they are or not), wouldn't that make whatever was done with them NOT Insider Trading?

Re:Uh (0)

Anonymous Coward | about a year ago | (#45166403)

As I understand it, the info is public, they are just closer to the source, and can act on that info faster than the next guy. Think of it as getting your newspaper right off the loading dock of the printing facility, rather than waiting for the delivery truck to arrive at your door.

Re:Uh (0)

Anonymous Coward | about a year ago | (#45166581)

+1

Re:Uh (0)

Anonymous Coward | about a year ago | (#45166545)

Illegal Insider Trading == using material non-public information to your advantage when you have a fiduciary duty to the entity whose information you're leveraging.

Insider trading itself is not per se illegal. You don't want it to be. If you accidentally tell your friend about a merger, you create all kinds of problems by holding that friend accountable if he uses that information to make a profit. Now all of a sudden you have to worry about the legality of every piece of information you obtain. Whereas if the only thing that's illegal is using the information you obtain directly from someone you owe a duty too, it's much easier to know what's right and what's wrong.

Re:Uh (0)

Anonymous Coward | about a year ago | (#45166855)

Not sure I follow this. Trading on inside information [wikipedia.org] is illegal. If you knowingly (or suspect) receive inside information, and trade based on that, then the SEC can take you to court. Proving that what you knew may be a different matter, but if you are the brother of the CEO, or a known close acquaintance, expect to get hassled at a minimum.

Re:Uh (0)

Anonymous Coward | about a year ago | (#45166709)

I guess it depends on your definition of "public". Sure, anyone can have this public information if they have $X,000,000 + $14,000 a month to rent the right space.

It's kind of like the Supreme's Court'd definition that dollar bills equal free speech. Sure we all have 1st Amendment Rights; it's just that the rich have more 1st Amendment Rights than the rest of us.

Re:Uh (1)

Anonymous Coward | about a year ago | (#45166487)

Isn't HFT just insider trading?

No

Re:Uh (1)

radarskiy (2874255) | about a year ago | (#45167001)

In a way it's like the opposite of insider trading: since the trades are communicated faster than anything else, they cannot possibly be based on information.

No Value from this (0, Troll)

Anonymous Coward | about a year ago | (#45166243)

The fact that trades are held a mere fraction of a second sends one undeniable message - these are purely middle men that do nothing more than raise the prices of the commodity they're working with - the system could, and should, do without them. They server no benefit to the actual users who are using the system as it was intended and globally designed

Re:No Value from this (1)

ShanghaiBill (739463) | about a year ago | (#45166409)

these are purely middle men that do nothing more than raise the prices of the commodity they're working with

Actually, they are middle men that lower the price of the commodity. You should look at the history of transaction costs before and after the adoption of HFT. The have fallen dramatically. If they didn't offer better prices, why would anyone trade with them?

the system could, and should, do without them. They server no benefit to the actual users who are using the system as it was intended and globally designed

You have a weird mental model of how stock markets work. They have always relied on middle men to execute the trades. The only difference today, is that the HFTers are far more efficient.

Re:No Value from this (0)

Anonymous Coward | about a year ago | (#45166647)

Exactly.

It's amazing how ignorant people here are about economics.

Re:No Value from this (1)

dthulson (904894) | about a year ago | (#45166413)

Middle men can have value: for example, the grocery store, distributors, etc are middle men between you and a farmer. Does that make them evil?

Re:No Value from this (1)

sjames (1099) | about a year ago | (#45167189)

That's the entire financial sector in a nutshell. A bunch of people moving numbers on a balance sheet and imagining they are more important to progress than the people who actually invent new things and the many many more people who actually build them. It's rent seeking at it's worst.

Put 5 bankers in a room with a broken toilet and you'll have to piss on the floor. Add one plumber to the mix and all is well. So who is the important person there?(assuming you don't enjoy slipping and falling in piss)

Re: "What useful purpose" (4, Insightful)

deego (587575) | about a year ago | (#45166439)

Why are such articles full of people wanting to outlaw or restrict HFT?

Just because *you* don't see a useful purpose does not exist.

And, just because a useful purpose may not exist, does not mean it should be outlawed.

How about we outlaw your watching American Idol and facebooking as well, since it does not serve a useful purpose?

Because it can be harmful (1)

sirwired (27582) | about a year ago | (#45166995)

HFT is innocuous when it works. When it goes haywire, it can have very real consequences. Have you already forgotten the "flash crash"?

Re: "What useful purpose" (0)

Anonymous Coward | about a year ago | (#45167003)

The stock market is already a highly-regulated entity. Not in the sense of pollution regulation or safety regulation.. the stock market as we know it exists within the confines of regulation, in precisely the same way a rulebook creates a game (like chess or checkers). The stock market *exists* because of its regulations.

With that in mind, the game can just be altered at whim by those who write the rulebook with no need for moral outrage, since there is no 'free market' of stock markets in the first place.

Why? (1)

qaz123 (2841887) | about a year ago | (#45166479)

Because we can

Opportunity (0)

Anonymous Coward | about a year ago | (#45166553)

Find the closest data center and lease enough space to run a high speed router...

Then get your own fiber to a cheaper place with as direct a line as possible. Or, colo that router directly with a telco or some space on the trading floor, somehow.

HFT Profit (0)

Anonymous Coward | about a year ago | (#45166741)

Step 3 = Profit. - Funny

HFT Does add incredible liquidity , making markets more fare for the retail investor. Penny wide markets.
HFT has added great technology to the business and eventually that technology developed by HFT firms has made its way to retail investors.
HFT firms have to pay for every order/ cancelled trades etc not, supporting the markets and reducing the cost to the retail trader.

If is is so easy, then spend millions developing technology, implement that technology, and profit. If you think these firms make money because they get the news 3 mS before everyone else, you are wrong.

Fiber length? (1)

Beorytis (1014777) | about a year ago | (#45166935)

Some facilities such as the Mahwah, New Jersey, NYSE (New York Stock Exchange) data center have rolls of fiber so that every cage has exactly the same length of fiber running to the exchange cages.

That just seems silly. They should be charging higher rents for the shorter cables.

That's a pretty reasonable price for a rack (1)

sirwired (27582) | about a year ago | (#45167029)

I price out data center space (among other things) for a living, and punching in a rack consuming that amount of power in our considerably more remote data center, and using our default profit margins, it didn't come out that much cheaper.

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