Prof. Dr. Vincent Courtillot, somebody who knows what they are talking about and isn't invested in the global warming economy. Also it's interesting that he could not get the raw data because it is classified! Take 30 minutes and you'll learn something about numbers and statistics and a little about global warming.
our previous discussion is archived. If you wish to continue email me temp101 at rdrtech.com. This is an alias and you'll get my real one once you contact me.
If it takes lots of interaction (and nothing else) between market participants for the market to settle down at some particular price, and HFT allows more interactions faster, then price discovery should occur faster with HFT, I agree. I just don't think that the price HFT arrives at is better than before, it is only faster. If there is a particular point you want me to take from the linked article, then I'll look for that. I did skim the abstract and conclusion. I'm not surprised that there is a link between HFT prices and news, but I'd be surprised if HFT prices aren't worse valuations than human speed prices are, since HFT prices in reaction to news have to be based on computerized reading of the news, which can't be all that accurate or insightful.
No particular point, it was just a reference to determine price discovery. Definition of terms is fundamental when discussing anything.
We're getting into the nebulous here and can discuss this until we are blue in the face. " just don't think that..." well I *THINK* faster discovery is better. So how deep a blue are we going to go
The reason I think it is better is because even though the price at the moment of "discovery" may be off by a bit, there will be a drift from that moment to a better discovery. The moment being the point after volatility settles after a major move due to fundamentals, technicals, or "irrationals," people's knee jerk reaction. The market will snap to stability faster which then you get a minor drift to better. A quicker move to stability in the micro scale lends to overall stability. From that foundation of stability a better price discovery results.
HFT is not about valuation, it's about doing exactly what human MMs do at a much higher speed, which is providing liquidity and deriving profit from the spread.
I could turn this on its head and say that HFT increases market maker risk since the HFT traders could move against the market maker faster than the market maker can respond to them.
Almost exactly my point. Human market making is dwindling. It is moving into the deeper areas of the book for heavy volume trades, almost a niche market. The market of providing liquidity has a finite amount of room, which is almost directly proportional to market volume. Well over 90% of HFT is MMing, which means there's been a reduction in human MMing. Many humans have been burned in the scenario you suggest, also many HFTs, thus the large reduction in HFT over the past few years. The market is rebalancing due to many HFTs losing BIG.
Ref: MMs http://en.wikipedia.org/wiki/Market_maker.
So I'm sympathetic to the freedom argument that we can't go around banning every single harmful thing, but I'm not sure that that argument is so strong for trading in the market as it is for most other things like growing marijuana (which is never the less illegal).
I completely agree, it's why the financial markets are the most regulated industry in the US. I don't think we need more regulation but I do think we need better. The recent Barny-Frank bill is causing hedge funds to go further into the dark, just check out what Soros is doing.
According to Google, the world's gross domestic product in 2009 was $58.26 trillion=$58260 billion, so $141 billion is about 0.24% of the world's total yearly output. I think that's a tremendous amount of resources and more than I would have thought. I'm also not sure that only hedge funds do HFT, but perhaps "hedge fund" is defined broadly enough that that would be true.
The $141bn is what is under management, this is capital derived from previous years GDP. The net gain from the trading is a percentage of what is under management, if you take a weighted average return of all HFT you'll come to a number well below 30%. So lets use 30% and you get about $42bn net world GDP. You end up with
For the purpose of this discussion we can lump all HFT under hedge funds. Easier than defining it further.
When I tried to mod you +1 I got "You've already posted something in this discussion." I also got an email from slashdot, I think they're working on it. In any case the option to mod shouldn't be coming up. It only happens to the posts after I've posted, so I didn't have the option to mod comments prior to my posts.
Now this is weird, I can mod your comment I'm responding to. I just posted today, this is very weird (aka bug). Respond to this post and I'll mod it up one and we'll see if it sticks.
Sorry about this but I can't think of any other way to contact you... I've discovered a bug with slashdot, I'm waiting on a response from them before I post in our other discussion. It's odd I can mod your most recent comment even though I've clearly posted in that story.
Not better, faster.
This is the best public information that I can find on price discovery, you'll have to do a bit of gleaning. I believe you are commingling price discovery and valuation. Valuation takes an extreme amount of effort and time that the markets rarely reflect.
http://www.ssc.upenn.edu/~fdiebold/papers/paper61/abdv2_062804.pdf
How is speed of transactions relevant to this situation, or are you thinking of something else?
The faster you are the more risk you can take with less possibility of return. The tighter the spread the less return a MM will receive, per transaction. Low latency allows for quicker reaction time to adjust prices, minimizing risk the market will move against you. If MMs can get out of a bad position, as a liquidity provider, much more quickly risk is reduced and parties are more willing to offer MM services for less profit, i.e. tighter spread. In this regard HFT is market making or liquidity providing. There is substantial evidence showing that HFT absorbed quite a bit of the flash crash of 2010, delaying the inevitable rather than exasperating it. The crash started as HFTs pulled out and stopped absorbing the toxicity.
Crashing your car has the benefit that then you'll be driving in a brand new car. So that is a benefit of crashing your car. Yet crashing your car is still harmful, and pointing out the benefit of having a new card to replace it doesn't negate that. So if someone tells you that crashing your car is just harmful, it's not a good point to say that he is forgetting about the benefit of having a new car, except perhaps to make him feel better.
You are miss-characterizing my statements. There is nothing broken/destroyed, HFT does not harm, except when used illicitly just as a knife harms when used illicitly.
I think you might not understand what I wrote. If HFT doesn't provide significant benefit to the world, yet significant money gets allocated to pursue HFT, then the harm to the world is the opportunity cost of those investments.
This argument can go for man many things in this world. You can always argue that where some money is put it can be put to something better. Also HFT is a tiny, *TINY*, fraction of all infrastructure and development that goes on in the financial world.
As of the first quarter in 2009, total assets under management for hedge funds with HFT strategies were US$141 billion, down about 21% from their high.
http://en.wikipedia.org/wiki/Algorithmic_trading
PIMCO has over USD$1 trillion under management and that is one entity and they do not engage in HFT.
Markets are good because they allocate resources to the most productive endeavors. However, there is a mismatch between the interest of individual traders and the interests of the market/world. One example of that is insider trading - it is bad because it mis-allocates resources based on something that isn't useful to the world, yet it is very profitable. HFT is redistributing a lot of resources, but you have not demonstrated that the benefit that HFT provides is anywhere close to that.
I believe you are over estimating how much HFT is as part of the financial industry. There is only so much room that HFT can function, it is limit of market mechanics. It will grow in proportion with market growth. Tighter spreads across the entire financial trading realm returns more to the pockets of other traders than what has been made from HFT. HFT is a net positive.
I agree there is significant mismatch, legal and illegal. The finance industry has a higher proportion of psychopaths that would swindle their own mother for a buck. It has been this way since the Knights Templar became a popular tax haven and that capital eventually gave rise to the first world banks.
http://www.middle-ages.org.uk/knights-templar-banking.htm
It's been > 12 hours today of C++ multi-threading and parsing 100 20GB(compressed down to manageable sizes) brain dead csv files. I've been responding between some long jobs. I'll respond tomorrow. Thanks for the discussion, I've been enjoying it!
I do imagine that if the market was limited to trading to once a day, then increasing speed to once an hour could provide some benefit. That is not what we are discussing though - we are discussing going from a minute to a second to a millisecond to a nanosecond and so on. The difference is that a day and an hour makes a real difference to human being trying to do something even if that human doesn't care about being first. The difference of a minute to second doesn't mean as much, and a second to a millisecond doesn't matter much at all other than for being first.
So speeding up trading, which by natures means reducing latency, stops being beneficial at some point? Lower latency by it's very nature no matter how low the latency allows for better price discovery, see below.
Trickle down technology happens because money is flowing to HFT and HFT requires technology. If the money did not go to HFT they would go somewhere else and I don't see why that could not equally result in technology development. This is the broken window fallacy. In any case I doubt that a very large amount of the money flowing into HFT results in open technology that gives benefits beyond the HFT firms where the technology is developed, since HFT firms are in direct competition and revealing their technology puts them at a disadvantage. To put it pointedly, I doubt that putting money into HFT is a cost-effective way to improve Linux. If that were the goal, it would be much more efficient to impose a tax on trading and use the money to fund Linux development. So I don't think that trickle down technology is a strong argument in favor of HFT.
I wasn't posing it as a strong argument. It's *something* beneficial, in which you claimed HFT only harms. You've moved your argument away from the original point.
How does faster trading lead to a lower spread? I understand that computerized trading leads to lower costs which would reduce spread in a competitive market and I understand that increased competition would lower spread. How does faster trading do that, if I'm willing to wait a little bit to buy or sell?
Faster trading, by very nature includes lower latency, encourages competition over smaller amounts of profit. If there is a spread of 10 points on a security; somebody that can be faster means they'll cut it down to 8 or 9 points. Somebody who gets a little faster will then undercut them yet again. When the spread is one, getting there faster means you get filled before the other guy. With a spread of 1 or 2 you've reached a point of significantly diminishing returns.
It seems to me that HFT can't really help with price discovery. At most, it seems to me, it could make the price settle down less than a second sooner than it otherwise would, which is pointless. In any case, for the price to reflect something real, which is how price discovery leads to a benefit, the price has to reflect something real about the world. HFT acts only on the activity already in the market, so it doesn't add any new information, and if it does add information, say by reading the news very quickly, all that happens is that this information gets into the market less than a second sooner than it otherwise would. Is that wrong?
Any time it settles down faster is an increase in efficiency and by very nature lends to better price discovery. Market makers on the floor only act on the activity already in the market. HFT only does it faster. So the activity of human MMs doesn't add any real information?
The harm that HFT does is that it wastes resources that could otherwise be allocated in an efficient way. Consider the recent Slashdot story about a transatlantic cable laid down to transfer information a few milliseconds faster between exchanges. I believe that a few milliseconds faster trades between exchanges doesn't benefit the world. If I'm right here, one effect of HFT is to extract money from the stock market without providing a benefit and then pouring it into projects like this cable that also doesn't do anything useful. Another way of saying it is that the harm of HFT is the opportunity cost of the resources that HFT extracts from the market.
You are falling back on old arguments in which you have not provided any evidence. How does HFT harm? Nothing backing it up but what you believe. Please backup what you are saying, I'm very seriously interested in discovering the truth. The transatlantic cable is a large investment in which banks are lining up to pay. It's not all HFT, in fact much will be MFT that needs to react FAST with a few trades. You pose an interesting theory but again have nothing to back it up. Also the current pipe is clogged up something fierce. I wonder what the costs of laying a new pipe just for bandwidth would cost? Subtract that from the actual cost of the pipe and then you have your HFT difference, in which you have to subtract out the MFT stuff and other low latency applications.
"How does the HFT being further in front benefit the world, though? I think it only benefits the HFT trader."
HFT has tightened spreads so the HFT trader is providing more liquidity and better price discovery for everybody. The competition amongst HFT and market makers is to get there first. So speed does have an advantage to HFT and the market as a whole. As speed increases spread, generally speaking, decreases. I observed this in the spot forex market as more and more entered HFT. Spreads significantly tightened, of those I watched especially the GBP/JPY and GBP/CHF narrowed by 50%. I ran a MFT (Medium Frequency Trading) algo that hugely benefited from this.
"Where I don't agree is that having the opportunity to beat a competitor is a benefit to the world."
The case I'm making above is it tightens spread which is better price discovery.
"I agree that trading faster is a good idea for the people who are able to be faster than everyone else by doing so. I agree on this in the same way that I agree that insider trading grants a benefit to the person doing it."
Insider trading is exploiting something that nobody else has, period. HFT is exploiting your own efforts and resources to execute in less time. Others have resources and the ability to put effort into HFT, there is no exclusivity. In theory if you get into naked connections to exchanges then this statement becomes invalid, regulation is attempting to correct this.
"In fact I see harm, since, as you acknowledge, fast trading does not in itself produce value over slow trading, and perhaps the slow trader is actually doing smarter things, so he should be beating the fast trader. "
please re-read my statement...
"if you made all of them equally faster there's no point"
There is a point in an HFT firm investing time, resources, and effort to achieve a speed increase over the others. If all trades took one day to execute, and then something happened to decrease latency to one hour and was EQUALLY granted to everybody then there would be one benefit, better price discovery. So I retract my statement, this is something that I did not consider previously. FASTER trading, just in theory being purely faster provides better price discovery. As information changes the faster the market reacts the more efficient the market is. There is a point of diminishing return and we have crossed that point but there is return.
In summary HFT provides...
- Better spreads which create lower transaction costs for Joe Trader
- Better price discovery, i.e. market efficiency
- Trickle down technology
So far I've not heard an explicit example as to how HFT harms.
Sorry about the NDA.
You've posed as philosophical discussion rather than a discussion regarding the technical merits. Trading used to take days, then hours, then minutes then seconds... Each step of the way there were those that said the same things you are saying. As to Rewarding fast trading, the market rewards those that take the risk and take it before somebody else. It's been that way since the dawn of securities trading.
Trading faster means a more efficient market with better price discovery. We are reaching the point of diminishing return but that will not stop those seeking a profit from pushing harder. Which by the way a significant portion of Linux kernel improvements have come from the finance industry pushing the envelope. The same for the first adopter principle of hardware. There is a LOT of trickle down.
"Great. The problem is that trading faster doesn't result in something of value for the world that trading slower would not also accomplish"
It would eliminate the ability to beat your competitor. It would introduce an artificial lag in which many things can happen in that would invalidate the reason for your trade(s). You would not be able to cancel your trades in a timely matter because all trading activity would have to follow this rule. i.e. introduce a 2 second delay, at 1.9 seconds market dynamics change and your system sends a cancel for the trade, it'll take 2 seconds to get there leaving 1.9 seconds for your original trade to execute. So lets say you let cancels through immediately, that 2 second window is known and will be exploited by those that develop some arbitrage that exploits that edge case. Now the market is behaving in such a way that is exploiting an artificial construct while attempting real price discovery, creating more volatility.
What if you are a news trader, you have a low latency news feed and you execute trades based on events in the world. There are many human mistakes in reporting the news, fat finger a 9.0 earthquake vs an 8.0, HUGE difference. That 2 seconds can mean the difference between a good trade and a bad trade. Somebody that has a higher latency system and gets the information LATER and executes a trade that has exploited the mass move by those that had the earlier information and their trades are now just hitting the exchange. This introduces a bias and can and will be exploited.
"Again, I ask you, if everyone who now trades in less than a second could suddenly trade in less than a nanosecond, at no additional cost, how does that help anyone?"
It doesn't, the advantage comes in incremental movements where a few get ahead of everybody else. It's the nature of competition. You pose the question in such a way as to bias the outcome. It does not reflect real world mechanics.
The whole point of trading faster is to be further in front. Similar to racing cars, those that come in 1st win more than those that come in 2nd, 3rd, 4th... If you made all of them equally faster there's no point, but if the one in 4th makes some improvements and then is able to take 1st, he wins.
I did not say making faster cars, "Building cars faster..." Making more cars in the same amount of time, compared to making more trades in the same amount of time. That is the analogy I was drawing.
HFT is defined for this discussion as market making otherwise known as liquidity provider.
No mater the application, humans have always tried to do things faster. The assertion of trading at speeds of fractions of seconds having no intrinsic value is correct. Speed in of it's self has no value, it is the utility that is derived from such item/activity that lends intrinsic value; speed only multiplies that value (off the top of my head I cannot think of one thing in which making it faster reduced value.) Perception of reality drives intrinsic value. If nobody valued gold, gold would not be valuable. HFT follows the same line of reasoning. A vast majority of the profits of HFT is derived from competing with the previous generation of market makers. The first ones to really hit sub second speeds made a killing at first then the market became flooded, higher competition and margins became razor thin for anybody that was not the fastest. This is the same thing with human market makers. The fastest took the lions share, everyone else had razor thin margins. It's now an arms race of infrastructure for the Ultra High Frequency Trading. This has resulted in many leaving the HFT arena, there is only so much that can be made and the costs keep going up while potential profit is flat or declining.
Your arguments are the same as as every industry has "suffered" from the advent of progress. Mechanized farming, automated industry, computerized accounting... All allowing for more to be done in the same amount of time. In fact the original definition of computer was a woman doing menial math in a room of women, at least in the USA. It was the social dynamics of the time that it was a "woman's" job to do the menial task. As computers became more ubiquitous the human labor had to change markets.
Accounting is now faster than ever because of spread sheets. What took hours before the PC and spreadsheet took seconds.
RIAA/MPAA have the same issue with digital distribution.
HFT takes nothing from Joe Trader, as I've outlined in a previous post, and usually helps him (tighter spreads) The brokers screw Joe Trader with high transaction fees. Similar diff of wholesale and retail.
So far I have outlined in this post and others how HFT benefits, I've not found on example that I have not easily discredited, that shows how it harms. No one has been able to discredit my comments, all assertions have been emotionally based (irrational or otherwise.)
You hid behind an NDA and then made this statement
"The NDA was put in place so we could discuss specific timing advantages they had over competitors."
You should be able to discuss topics outside the "specific timing advantages" to detail how HFT harms. Please correct me if I am wrong, I seek truth as it is THE most valuable thing we can possess.
In many interviews, face to face, I had there was one NDA. There is MUCH I could discuss about that interview that would not violate the NDA. I smell straw man defence. If the NDA says you cannot speak about anything in the interview, which means you cannot work with anything that was in the interview then it is incredibly foolish to sign.
"The problem here is that trading faster than humanly possible is pointless in itself - there is no intrinsic benefit."
So building cars faster than humans with computerized machinery has no intrinsic benefits? That's the logic you are utilizing.
As to making the money, where does it come from? It comes from the market makers on the floor. Just as manual labor is being replaced so are the floor traders that used to provide the liquidity. When there were no computers the traders on the floor, market makers, were competing to get ahead of the others, their competition. Now that we have computers with algos that simulate what the MMs do they are competing with other algos. The computer reacts much faster than a human so it is only natural that they compete in the microsecond realm, soon to be nano second. The benefit is tighter spreads which means better price discovery which means better market efficiency which means a better price for Joe Trader. The profit that goes to HFT didn't come from Joe Trader, it came from the MMs who had wider spreads because they couldn't react as fast.
When things go wrong, they go WRONG. Please observe
http://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_Dow_Jones_Industrial_Average
9 of the top 10 largest percentage drops in the Dow Jones happened before 1990. This would ague the fact that algo trading has stabilized the markets. The flash crash was about 9% drop which would be #5 on the list if it closed at the day's low. DISCLAIMER: One data point is always "bad" when attempting to draw conclusions but I'm not attempting to conclude the matter. There are many more far more informed and intelligent than I who have attempted this.
Also there is a lack of clear communication. What you are referring to is Ultra High Frequency Trading (UHFT.) I have worked with HFT that would buy/sell many different products as the algo adjusted then hold when it came to a "final" decision. This hold could extend over hours if not longer. This is the scarey part because it exposes the Black Box that I alluded to earlier. HFT means different things to different people which allows anybody to say anything and make up their own facts.
Kleeneness is next to Godelness.
