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Banning High Frequency Trading


moore_capital54
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After reading Coopermans points, I am so happy to see him discuss this topic. I have personally had it with HFT having seen first-hand how these guys work. A colleague runs an HFT Fund and they start the day with cash and end the day with cash. There is no way they are helping the market or the average investor when they MUST end each day back at cash. I really hope that lawmakers can realize that HFT is a huge tax on capital markets and makes zero sense. It is one thing to have daytraders like SAC capital extracting spreads all day, but it is another to have robots doing it with insane leverage and speed that cannot be matched. They even place their servers next to the exchange servers to gain an extra nanosecond. This is not the way capital markets are supposed to work, and the long-term investor is getting shafted!

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According to Wikipedia:

 

By 2010 High Frequency Trading accounted for over 70% of equity trades taking place in the US and was rapidly growing in popularity in Europe and Asia. Aiming to capture just a fraction of a penny per share or currency unit on every trade, high-frequency traders move in and out of such short-term positions several times each day. Fractions of a penny accumulate fast to produce significantly positive results at the end of every day.[5] High frequency trading firms do not employ significant leverage, do not accumulate positions, and typically liquidate their entire portfolios on a daily basis.[6]

 

At the end it says they typically don't employ "significant leverage". Too bad, I'd love to see them blow up more often  ;D

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DCG, they probably have an HFT algo doing the accounting as well :)

 

They do in fact use significant leverage, as high as 50-100 to 1. The key here is that they all go home cash so they manage their exposure intraday. That is why it is impossible for them to lose everything unless the market went down 20-30% in one day, which may happen if we keep going like this.

 

I have never seen the market as volatile as it has been over the last 3 years, some will say that is due to the economic climate but there is a bigger trend here and that is the adoption of HFT now accounting for 70% of ALL Equity trades which is just ridiculous.

 

People like Myron Scholes will find ways to rationalize the existence of HFT's with some industry funded research report, but we all know the truth..

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Guest Hester

I think there's an easier (way) to let HFT go down the tubes: don't cancel the trades when the robots go haywire.

 

YES. If you use robots not capable of thinking, it is a risk that you will accidently sell your Accenture shares for 1 penny. They don't deserve to have these risks nullified by regulators. This isn't amateur golf. No more mulligans.

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They ALL make money, all they are doing is jumping in front of the bid ask spreads, and on more liquid stocks manipulating the bid ask spread based on a real time weighting of the book. They make very little money per transaction but it adds up. If they don't make money they would not be in business. Its not like investing, they end EACH and EVERY DAY with a profit, which is essentially a toll on the net buy volume of that day, thats all it is.

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Lets tax them per transaction and reduce the deficit.

 

Packer

 

I was just thinking the same thing.

 

I am of the opinion that computer driven trading from these HFT + leveraged hedge funds/quants are driving/amplifying at least some of  the volatility recently---Maybe this will help some of us "small guys" i.e lower prices.

 

Being a value investor is the way to go.

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Does it make a difference if they increase volatility? For all I care they let stalwards move 20% up or down each day, if you hold for the long term it won't matter and short term it creates opportunity.

 

Probably very shortsighted of me. Please nuke my idiotic remark.  :)

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Does it make a difference if they increase volatility? For all I care they let stalwards move 20% up or down each day, if you hold for the long term it won't matter and short term it creates opportunity.

 

Probably very shortsighted of me. Please nuke my idiotic remark.  :)

 

What good is an intrinsic value calculation if there are no buyers. Mainstreet will get bored or scared and pickup their huge ball (401k and pension funds) if they feel the markets are nothing more then a casino with huge moves up and down every other day...

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Myth, good point.

 

It was interesting that with all the downs + up, market was only down 1.7%(it sure  felt like more). Maybe folks will become more long term orientated i.e realize that even though their holding fluctuated a lot, at the end of the year they are still up 7%(just an example) which is better than 0 for everything else available.

 

Its interesting that 70% of trades are held for a fraction of a second. That should average down the average holding time for a stock,LOL.

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What good is an intrinsic value calculation if there are no buyers. Mainstreet will get bored or scared and pickup their huge ball (401k and pension funds) if they feel the markets are nothing more then a casino with huge moves up and down every other day...

 

I'm not sure the market has much memory. If they could be scared that easily, 2008-2009 would have driven everybody out, yet a couple years of rising markets seems to have brought many back in. They might run now, but if things go up for a while they'll be back... and almost by definition, these people end up selling low and buying high.

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After reading Coopermans points, I am so happy to see him discuss this topic. I have personally had it with HFT having seen first-hand how these guys work. A colleague runs an HFT Fund and they start the day with cash and end the day with cash. There is no way they are helping the market or the average investor when they MUST end each day back at cash. I really hope that lawmakers can realize that HFT is a huge tax on capital markets and makes zero sense. It is one thing to have daytraders like SAC capital extracting spreads all day, but it is another to have robots doing it with insane leverage and speed that cannot be matched. They even place their servers next to the exchange servers to gain an extra nanosecond. This is not the way capital markets are supposed to work, and the long-term investor is getting shafted!

 

Well, I totally agree with you. I could also recommend the Forbes issue from January 22, 1996, with the cover story of Charlie Munger, one of the best issues ever. I personally own it, like a shrine: Charlie talks there that plumbers are useful, investment mangers and Wall Streeters aren't.  ;) He says that if security trading in America were to go down by 80%, the civilization would work better. And if he were God, he would change the tax rules so it would go down by 80%, in fact by more than 80%. Charlie even once did propose a 100% tax on short term capital gains taken in less than a year, but I guess this would never be popular for the folks like SAC et al. Anyway he adds that on a net basis the whole investment management business together gives NO value added to all stock portofolio owners combined. That isn't true for plumbing and it isn't true of medicine. Warren agrees with him 100%. They would both shake their heads at the brains that have been going into money management. What a waste of talent. Beating the market averages, after paying substantial costs and fees, is an against-the-odds game, yet a few people can do it, particulary those who view it as a game full of craziness with an occasional mispriced something or other. But personally i prefer people that do it the old fashion way and use their brains as their main computers, read some Value Line and occasionally watch their Bloombergs. LOL  -- SAC and the other Quants put too much input, computer wise and manpower wise, in the same output that the early Buffetters, i.e. the Graham and Doddsviller's of ther early 1960's and 70's would had achieved with just a one man operation. The battle between the HFT's and the slow moving value guys, is like in Star Wars, where Obi Wan Kenobi tries to teach Luke Skywalker just to use old fashioned tools, like a simple lightsaber instead of fancy weaponry. Nanoquant servers bondaged to exchange servers to squeeze a bit vs Graham & Doddsviller's only studying value gravity in their Value Line manuals.

Well, but don't be bewildered, the one guy, I highly admire, maybe he is the BlackSwan in this Quant field is Jim Simons with his "RenTec" organization, a guy with decades of outstanding results, integrity, and by incorporating the research done by Elwyn Berlekamp (i.e: Axcom), Claude Shannon, John Kelly and Ed Thorp. You might be gawking, if I may describe Renaissance, as the virtually Buffett & Munger pressed into a bit. --- Prof. William T. Ziemba has done extensive research on Rectec's performance. I might be proven wrong after a 100 year storm, but currently they have tremendously weathered all markets. Time will tell. But Simons also has been hunted when his algorithm models used to buy and sell stocks were overwhelmed by securities' price swings. Renaissance had to adapt it's algorithms to sell positions, short-circuiting statistical models based on the relationships among securities.  I would personally refer to this process to Robert Axelrod's book "The Complexity of Cooperation: Agent-Based Models of Competition and Collaboration". Lucky Us!... regardless of balance sheet size, we all are prevented  by investing with Jim, because his main fund is limited to employees only and is closed to outside investors. I personally think, that this is good so, that we are prevented from nibble at his lusty apple. We are forced to use the old fashioned way our brains.

And, last but not least, one of the other so called HFT's in particular I have there my eye on a certain guy in Stamford, CT,... well, we all at this forum here know his confusing shenanigans. Like DeepCapture.com had reported in "Hedge Funds Reading Tomorrow’s Headlines Today", that certain hedge funds received advance copies, and traded ahead of bogus financial research produced by Morgan Keegan, a supposedly --independent-- research shop that was, in fact, working for those same hedge funds. That's a recursive déjà vu.

.

 

 

 

Terrance Odean, a behavioral economist & psychologist, and a professor of banking and finance at Berkeley, is worldwide the uttermost authority in studies of HFT. He wrote a masterpiece of research paper that should prevent the rational investor to bite in a lusty apple of hyperactiv trading styles.

 

Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors

 

http://faculty.haas.berkeley.edu/odean/Papers%20current%20versions/Individual_Investor_Performance_Final.pdf

 

Terrance Odean @ Berkeley EDU

http://faculty.haas.berkeley.edu/odean/

Research Papers

http://faculty.haas.berkeley.edu/odean/Current%20Research.htm

 

Terrance Odeon - Slide Show (2011)

http://www.scribd.com/doc/46874919/Terrance-Odean

 

Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investorshttp://www.moneyweek.com/~/media/MoneyWeek/2009/090601/MAS42_1-investor-perf.ashx?w=450&h=356&as=1

 

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Berkshire your post was great, I don't know where I am going to find that copy of Forbes, maybe I will write the archive department for it as it sounds like a really great piece for my library.

 

One thing i have to disagree with you though is on Rentec. There is enough evidence floating around to indicate that Jim Simmons created the HFT Craze, I have even read some court cases from ex employees that claimed their system would know when someone else placed an order. IE: You place an order to buy XYZ, Rentec can sense that, buy the shares before you and sell em higher knowing you most probably will change your order. Do that a million times a day 365 days a year.

 

That is the most credible explanation I have personally heard of which would have explained the performance of rentec.

 

Remember this guy was a codebreaker...

 

But it may all be BS....

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Guest misterstockwell

Berkshire your post was great, I don't know where I am going to find that copy of Forbes, maybe I will write the archive department for it as it sounds like a really great piece for my library.

 

One thing i have to disagree with you though is on Rentec. There is enough evidence floating around to indicate that Jim Simmons created the HFT Craze, I have even read some court cases from ex employees that claimed their system would know when someone else placed an order. IE: You place an order to buy XYZ, Rentec can sense that, buy the shares before you and sell em higher knowing you most probably will change your order. Do that a million times a day 365 days a year.

 

That is the most credible explanation I have personally heard of which would have explained the performance of rentec.

 

Remember this guy was a codebreaker...

 

But it may all be BS....

I don't know about Rentec, but this is how all my trades are treated these days. I used to see my orders show up on the bid or ask, and then see price respond. No more. My bid or ask NEVER appears on my quote screen, and the bid/ask will instantly run away from my order. The market is broken. HFT is screwing real investors.

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Kiltacular, I just read that PDF and I must say I am appalled, this is disgusting and there were things in there I had no idea about IE: the accumulated order feed that they buy from the exchanges.

 

How can the market serve its purpose as a price discovery mechanism when only a small portion of the market place has access to such proprietary data.

 

What is wrong with our regulators, HFT is outright fraud!

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Kiltacular, I just read that PDF and I must say I am appalled, this is disgusting and there were things in there I had no idea about IE: the accumulated order feed that they buy from the exchanges.

 

How can the market serve its purpose as a price discovery mechanism when only a small portion of the market place has access to such proprietary data.

 

What is wrong with our regulators, HFT is outright fraud!

 

moore,

 

I agree completely.

 

As for the regulators, well, they're out finding the next Bernie Madoff........oh, wait a minute ;)

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