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SEC May Ticket High Speed Traders


Parsad
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I am still trying to figure out how, or if, these operations make money on an after tax basis. 

 

i.e. you buy 1 m shares of Bac at 8.01 and sell it a few seconds later at 8.02.  That nets you 10000 pretax, say 7000 after tax.  Your next trade you lose the same $10000 pre tax but you cannot claim the capital loss.  Therefore you net (3000).  If your algorithm only sells your shares at a gain you run the risk of becoming a long term shareholder. 

 

I know the trick is about beating other HFT traders but it seems to me the ultimate beneficiary is the tax man.  In this case the tax collector plays the role of the house skimming its 30%. 

 

Adding a one cent tax to every share traded would kill the entire business.  I must be missing the part where the programs create cash out of the air. 

 

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I don't understand the effect (or even the underlying mechanisms) of HFT very well--if anyone felt like giving me an overview or pointing me to something, I would appreciate it.  For example, I have heard them say they provide liquidity or are market makers, but it seems like they are likely just adding frictional costs to the overall system?  Are they doing the world/market any service?

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I have a friend at one of the big HFT firms. Last year, they were doing 1 million trades/day, 90% of which were done at the same price(buy/sell at same price). The exchanges pay a 1/4 cent per share each way for providing liquidity. They deal in nanoseconds. He told me that by the time you see a quote change on your screen, they could have made a thousand trades on that info. It has changed some lately as now everyone is super fast, so nobody has an edge. Their holding period has expanded to minutes in some cases. However, when things get crazy, they get out and their contribution to "liquidity" vanishes. There is your flash crash. In my opinion, they do absolutely nothing positive for the financial industry. They have ruined the normal buy/sell pressures that controlled market price previously. The costs they have added to my normal buying and selling is significant. The market no longer functions normally, and we all pay a high price for them to screw us.

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Mark Cuban had put out the idea of charging $0.01 a share on all trades on top of the commissions.  I think it would have to be higher than that to curb the computer algorithm trading.  But at least people are discussing and trying to fix it.

 

Bill Gates said many years ago, that they should also charge a fraction of a penny for emails.  So as to truly quantify the cost of spam and probably significantly reduce the amount sent.  I agree with both ideas!  Cheers!

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