Financial authorities in the UK and US are considering a new batch of regulations to limit the use of high-frequency trading computer systems by investment houses. The chairman of the US Commodity Futures Trading Commission (CFTC), Gary Gensler, said that the UK and US are actively looking at regulations on high-frequency …
High Standards and Most Professional
Trouble is, not about "In my personal view, on the technological scene, they are the most professional and have the highest standards that exist.". I'm sure the guys designing and building them are very professional.
It's the effect they have on the market as a whole which is the problem, siphoning off money from the system while only contributing instability.
No positive social function (except to pay for anti-regulation lobbyists' party political donations).
Adam Smith would have shat a haggis sooner than approve this kind of bollocks.
thirded - System Needs Damping
The system has a problem with oscillations. The solution is damping, whether by a fixed time for settling trades, or by a tax on this kind of trading.
I agree that however responsible the individuals, the system is wrong.
Dunno about the forcing to register, but, say, settling once per second ought to put paid to most of the flood-of-orders and flood-of-cancels trickery's effectiveness, not so?
Just tax any share transactions on shares owned under X days
The solution to that is to tax. A tax which goes from let's say 20% for holding a share for under a day to 0% for holding it for one quarter before selling it should get this one done once, for all and forever.
After that financial exchanges will become what they are supposed to be - instruments for raising capital.
hell a tax on anyone holding under 5 mins would solve this
Quote: hell a tax on anyone holding under 5 mins would solve this
Not necessarily. It will solve high frequency trading, but it will not solve most of short selling strategies.
A tax which covers transactions within less than one accounting period is beneficial for other reasons. It makes naked short (and most unjustified short for that matter) too risky. You have to hold on to your shares for 3 months and be bloody sure that they will drop. It also makes the overall company financial view less short-termist. An item of bad news will not kill the share price. It has to be consistent bad performance (and consistent good for the opposite) for shares to move in the right direction and so on.
The problem is that if the UK government do it half of those pretty buildings in downtown London will go empty. It will take at least 3-4 more Lehmans to get them to act even in a half-hearted way (or someone doing high-frequency trading of UK government debt).
It's all relative
"...they are the most professional and have the highest standards that exist."
You can say the same thing about sucessful assassins.
The jury is still out - yes they did cause the flash crash - they do narrow the bid to offer spreads and improve liquidity (in normal market conditions) but when things go a bit chaotic they do seem to make it worse.
Read the evidence...
"Yes they did cause the flash crash" Did they? All the evidence points to automated systems completing orders following an order to unload $4.1bn of e-mini futures contracts on the S&P 500 as quickly as possible.
Whether those automated systems run in microseconds or in sub-second, you'd have seen similar behaviour... It's not always the HFTs fault!
Here's an unreasonable idea: enforce a minimum hold time of 30 minutes.
Well, they make money by arbitraging across continents using high speed, low latency networks. In some sense their value is distributing market information faster than anyone else can, hence their technical prowess.Its far from certain that the flash crash was a high frequency trading issue.
The problem is that HFT gets the blame as a whole when often it is a part of this that is at fault. The part to which I refer people are flash orders. This is where, for a fee, an exchange will permit people to have a 30ms or so looksy at orders coming onto the market. This enables these users and their HFT systems to nibble away at the order to find the price at which it stops out thereby forcing the participant placing the order to always receive something like their stop price. Search Google for definitions of how flash orders work. Essentially it is like front-running the market and the practice is particularly abhorrent.
Flash orders no longer tradable on major Equity venues...
Flash orders no longer exist in the major US pools of Equity liquidity, solely in the options market. If you are unloading an Equity stop order, you are going to go to the major pools (NasDaq, Direct Edge, BATS, etc) so this isn't going to affect you.
Retarded, and only useful to chill the hoi polloi.
"During the trial it was revealed that high-frequency trading had made the bank over $500m since 1999"
FFS, we are going after small fish and a dead shrimp. Huzza! Have at them!
Meanwhile the Federal Reserve prints up about 1.6 TRILLION DOLLARS which are then distributed to cronies or which are used to buy overpriced government bonds off Goldman-Sachs. And don't get me started on the special status of banks which allow them to lend out more money than they actually own.
Yes, regulation of of high-speed trading systems will help. Like manicure on an alcoholic with bladder cancer.
CaptainHook - in my experience the exact opposite is what algorithmic / high frequency trading brings to the markets, i.e. they bring liquidity and stability to the markets, indeed most exchanges actively court the trading firms that specialise in this area for the benefits they bring.
High frequency traders are courted, because they pay good money to the exchange. In return, they get the right to fleece off the traders who actually buy and sell.
Value to society as a whole: 0
Value to the cronies running the scheme: 500'000'000 (for Goldman Sachs alone).
Boy, where can I sell my soul for such a number of zeros?!
Can someone explain why HFT is a good idea?
It seems to utterly fly in the face of what I thought markets were for.
Ah, you're probably suckering up the economic theories about why markets are *good*, but that's not what markets are *for*. The only purpose of a market is for participants to have the opportunity to profit by participating. HFT is a form of participation. It's a good idea because the people who use HFT tend to make money from it.
Whether it's a good idea for other participants, or for society at large, is another matter, but not one that worries your average participant. That's why we need a layer above participation which monitors the market's effects on the wider world, and regulates it, except we don't really have that layer.
What a market is for (by your definition of a market) is irrelevant to this discussion. The issue is regulation of that market. Markets are permitted to exist under the laws of a country and are controlled to benefit the society. The discredited theory of free markets (as distinct from what Adam Smith defined) sya that no regulation will lead to an efficient market that provides the best solution for a society. This needs revisiting.
You can't prevent people from doing this, the best you can do is make it uneconomic. A small transaction tax should fix 'em.
Let them eat cake...
So, you'd like to charge everyone a flat fee to conduct a transaction, making it even more difficult for companies to generate revenue? And you want to reduce unemployment?
Paris, because she understand that the US Federal Government serves her, not the other way around.
Need to be careful with that though as genuine arbitrage is useful. Add transaction taxes and market mis-pricings can grow larger.
If structured properly it wouldn't interfere
with non HFT - say 0.1% of the transaction as a fee. That wouldn't inhibit actual investors, but it would put the bite on HFTs.
Related but separate rant:
The extent of program trading in markets concerns me. Once upon a time markets were useful predictors about the futures of companies because successful people studied companies on the market and invested accordingly. These days people (me included) dump money in retirement plans that are managed by nominally smart people who tell programers who in turn do the actual buying and selling of the stocks. I worry that the algorithms have become more important than the company evaluations, and therefore the stock markets are now useless as economic indicators.
Forgot to finish about structuring.
Where I am most dubious about the solution is in believing that politicians would leave it properly structured even if they managed to start it out that way. Therefore I would opposite in practice.
From one Calendar Day, to the next, I think. Then at least the math works. A "Return" on investment implies retrograde motion of some sort. To put it a different way ... when you deposit money in a Bank today and withdraw it tomorrow, you are really the Bank's Bank.
This is so far from investment
That it's ludicrous. They don't carry market information around, they sit as close as possible to the exchange and use information nobody else has yet to drain cash out of the system. I can't see how this is remotely connected to what the stock market is supposed to be about - investing in companies that have a profit/growth potential.
All it does is take money from other players on the market. And when anyone figures out how to outsmart the robots in order to make their own profit, they get huge fines and (suspended) prison sentences.
The only way you're going to have the stock market work the way it was originally designed to is if you disallow electronic trading altogether and force real humans to make trades manually, like 'the good ol' days'.
Times change, people will always be looking for ways to push the envelope. Once you have electronic trading, which everyone wants, the next step is to push that as far as it can go which inevitably leads to faster and faster electronic trading.
There are a lot of states in between "No electronic trading" and "paying for a place close to the exchange so you can get information faster than everyone else"
Some ways would be taxes or fees (Tobin tax for example), or having trades work on a 1 second, one minute, one hour or even one-day clock cycle, you could institute minimum hold times.... All sorts of ways. None of these are likely to happen as the politicians and the finance houses are in each other's pockets, but there are possibilities that can remove the attraction of HFT without negatively impacting genuine investment.
They should be taxed into oblivion
Can't we just give them their own markets?
I mean just let those traders play in their own sandbox and disconnect that from the real economy.
Emperor's New Clothes
Dare I suggest that most of the practices in the Financial Sector should be banned, as they inherently do nothing to add any value to underlying assets? Markets should be to encourage investment in listed companies, nothing more. If you buy shares, it should be for the long haul - day-trading should effectively be outlawed. As for derivatives, swaps, short-selling and so on, these should be illegal to operate as investments, as they are nothing more than pure gambling, which can have a devastating effect on the underlying share and commodity prices.
PS - I used to work in the "industry" until last month. It's not worthy of being called an industry, all it makes is smoke and mirrors...
High Frequency Trading != Low Latency Trading
With experience in (genuine) low latency trading systems in Euro Govies I feel that I have some real knowledge of what's happening in that space. Hence the AC, or my ex-employers would not be happy. While HFT, more specifically arbitrage, relies on low latency connections, co-location and proximity services with the markets that they are active on the reverse is not true.
There are good reasons to offer low latency solutions, outbound and in. Where the prices you may offer as a market maker are driven by external sources (EUREX futures are the primary in the space I played in) you need to be able to offer the right prices to your clients but they will also be watching other dealers prices. If a client wants to trade in some asset then you have to be able to manage your own position in the interdealer markets; buying or selling at one price and then neither hedging or updating your own position in real-ish time can be a very expensive mistake.
"indeed most exchanges actively court the trading firms that specialise in this area for the benefits they bring"
... you mean:
"indeed most exchanges actively court the trading firms that specialise in this area for the MONEY they bring THE EXCHANGES IN FEES.
Tobin tax. Now. Go read about it.
"you'd like to charge everyone a flat fee to conduct a transaction, "#
The "financial services" sector takes a cut of a couple of percent every time Joe Public moves some money around, and the world hasn't stopped because of it.
Debit card payment to retailer? Couple of per cent, no problem.
Credit card payment to retailer? Couple of per cent, no problem.
Credit card balance transfer from one card to another? Couple of per cent, no problem.
Mortgage balance transfer from one provider to another? Couple of per cent, no problem.
Advice to Greek government on how to hide state of Government finances off books ? Couple of per cent, no problem (whoops, wrong example, never mind).
Tobin tax at a tiny fraction of a per cent when money moves from one rich man's City institution to another? End of the world!
It's a zero-sum game. If most CIty trading and traders really "added value" overall (the usual "liquidity" myths etc) there'd be sensible ordinary folk outside the City willing to defend them, in the same way as there are folk willing to defend the amounts we pay footballers etc. No sensible outsider defends the City as it is today, because they don't "add value" overall.
I guess you didn't hear B of A is now charging their customers
cause the politicians on this side of the pond decided to moot your debit card statement.
"So, you'd like to charge everyone a flat fee to conduct a transaction, making it even more difficult for companies to generate revenue? And you want to reduce unemployment?"
How about you pay a fee if you own the shares less than 1 day or 1 hour or even 1 minute - could have a sliding scale. The point is these guys want to own the shares for milliseconds - some people argue it makes the market more stable - others than it makes it more jittery - they can't both be right.
If you defend HFT and other pointless trades for the employment they create brings, why not create useless work elsewhere too? Wait, didn't we have this scheme to get everybody employed in the past? It went out of fashion in the late 80s / early 90s, but maybe we should have another look at it.
"some people argue it makes the market more stable - others than it makes it more jittery - they can't both be right"
therin lies the problem with economics, it is bloody complicated and ends up being about people which are notoriously hard to predict.
"The more complicated an economic system is the closer it is to failure" i cannot remember where that was from but I likes it
People as large groups are actually easy to predict. Individuals a difficult to predict.
The economics is als not very complicated. HFT creams millions from the system, imposes instability and provides minimal benifits. Most insiders who do not actively participate in it and some who do agree that it is a means of manipulating the market. The easy solution is to ban it outright.
So what is difficult, we seems as a society to be always willing to bend over for the small vested interest groups. Also as a society the US is suffering from a cultural ill which says that if it makes money it is good, regardless of the long term consequences.
"Most high-frequency operations also sell all holdings at the end of the day, and so contribute nothing to stock price stability"
But we don't want stock price stability. What we want is liquidity so that prices can change smoothly......
yes we do want price stability
since all our pensions, savings, 'investments' etc either with our knowledge or without all come back to the casino of the markets. People who are having to retire now are finding their pensions slashed. They'd quite have liked price stability. It seems to me that real people's lives are ruined by other people's gambling mistakes, and we ought to stop that. Never has so much been owed by so few to so many, but the few never pay - they swan off with their bonuses and pensions untouched.
They don't want price stability at all...
What everyone who invests wants is constant growth to counter the effects of inflation, which is why they are invested in markets. I wouldn't call that price stability, rather stable, continuous, persistent (and non-existent) growth.
Actual constant growth is the correct definition of price stability.
The idea of price stability is also not relevant. What I am sure the person means in reduced volatility. Also, more relevant is the idea that stock prices are expected to reflect the discount value of the business in the future, that is the investment value of it underlying future assets and earning. It is difficult to support the view of the market as a sustainable investment vehicle if over 60% of the trades are from HFT.
An outright Ban is the Only Solution
The only positive function I have ever heard HFT proponents propose as a reason it should be allowed to continue is that it provides liquidity and hence reduce spreads. If that is the only reason for it then it should go.
The government has a responsibility of ensuring that the the markets are healthy and serves the purpose to which they are intended. HFT is in effect sophisticated day trading or rather minute or seconds trading. I am not against day trading, however, HFT traders have the potential of manipulating the market and has become such a large proportion of the total market in terms of transaction values that it is discretionary at best.
What does it say about the health of the market when the more than half of the transactions are in effect day trades. Transactions that do not result in a true position being held by the traders. What does it also mean for the financial system as a whole when Banks actively participate in day trades to this extent.
If the only benefit to the system is in providing liquidity then it must go. Liquidity for liquidity sake makes no sense. in fact HFT would not be as viable without the higher level of liquidity so this is a self serving argument.
To be an obvious troll:
The markets are intended to allow people to buy and sell assets.
These guys are buying and selling assets, so their behaviour is congruent with a markets raison d'etre.
>If the only benefit to the system is in providing liquidity
But if I buy a stock with my monthly savings the only benefit I am providing to the market is 'liquidity'. Should I be banned? (Hopefully I am providing benefit to myself with future value, and benefit to the seller who wants cash now. But that is true of these guys as well)
and to stop being a troll;
I sort of understand where you are coming from but, to my mind, there is a big difference between 'these guys are harming stuff' and 'these guys haven't justified their profits to the baying mob'
"you didn't hear B of A is now charging their customers "
"you didn't hear B of A is now charging their customers "
That's right, I hadn't heard that, but anyway the picture is not significantly changed. The card issuer/bank has your money. You want to use your card to pay some of your money to someone who isn't the bank. In order to do this, it seems BofA now want a monthly fee for allowing your money out of your account to go to your payee. The monthly fee seems to be $5.
This $5 isn't instead of the existing %age fees paid by the "merchant" ie retailer, but the existing merchant fees seem to be expected to be (roughly) halved, which I imagine will leave the banks/card companies with a hole in their revenue stream which the scum will look to pass on to some other suckers somehow.
It's always the customers that pay in the end - just like the UK £multi-billion cost of compensation for customers who were mis-sold Payment Protection Insurance won't be paid by the individual banksters who got bonuses based on its "profitability". Nor will these costs be paid by the regulators who let the PPI be mis-sold. No, they'll be paid by the current customers of the guilty companies.
Nice work if you can get it.
What about the robots?
I wonder if they're looking at this sort of thing at all:
Here are some of the attempts to explain what's going on:
Just read this post about a previously unknown company overnight becoming the highest trading HFT on the new york exchange...