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Animated GIF of HFT volumes from 2007 through 2012


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higher volume = higher volatility

higher volatility = greater opportunity

 

Volatility is a value investor's friend.

 

This volatility is not the value investors best friend, this volatility is the type that could derail markets for months of not years and only end in disaster.

 

I seriously doubt that - please prove it. If it did, though, it would provide tremendous opportunity to those who have a 4-6 year outlook as opposed to what is typical of most market participants. A once in a lifetime opportunity, in fact, for value investors out there - if something was to happen on the order of what you suggest.

 

As Mr. Buffett has opined: "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

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higher volume = higher volatility

higher volatility = greater opportunity

 

Volatility is a value investor's friend.

 

This volatility is not the value investors best friend, this volatility is the type that could derail markets for months of not years and only end in disaster.

 

I seriously doubt that - please prove it. If it did, though, it would provide tremendous opportunity to those who have a 4-6 year outlook as opposed to what is typical of most market participants. A once in a lifetime opportunity, in fact, for value investors out there - if something was to happen on the order of what you suggest.

 

As Mr. Buffett has opined: "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

 

You're viewing it in too simplified a manner.  You are correct that volatility is our friend, but at the same there are trillions of derivatives contracts being written that have counterparty liability for financial institutions insuring against that very same volatility.  If you have a six-sigma event occur in the markets...be it equities, commodities, currencies, etc...some counterparty will be held liable for the ensuing risk.  If you have a number of institutions that become liable for significant sums, you could see another event like Lehman's or Bear Stearns.  The world cannot afford another calamity like that at the moment.  Cheers!

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I beg to differ. Daily on-exchange volume isn't that big (and surely an algo can be stopped within a day). Exchanges are extremely transparent, there are circuit breakers, trade cancellations and a lot of regulatory oversight. I think it is extremely unlikely that a bunch of market makers are a "systemic risk". Even the "original" flash crash (which in the end turned out to be a human error) was almost completely negated in two days.

 

The biggest risk in the market are still human participants, causing .com crises, mortgage crises and sovereign crises in the past decade. The flash crash is a non-event compared to those. It just gets a lot of media attention. It is new, we don't understand it so we are scared of it.

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I beg to differ. Daily on-exchange volume isn't that big (and surely an algo can be stopped within a day). Exchanges are extremely transparent, there are circuit breakers, trade cancellations and a lot of regulatory oversight. I think it is extremely unlikely that a bunch of market makers are a "systemic risk". Even the "original" flash crash (which in the end turned out to be a human error) was almost completely negated in two days.

 

In fact, all HFT firms are essentially in 100% cash at the end of each trading day. They aren't going to cause any six sigma event, let alone a three sigma event, given that they close out their positions very quickly. People forget that the cascading of the Flash Crash occurred due to a lack of liquidity (i.e. HFT disappearing) rather than due to the additional liquidity that HFT thankfully provides

 

Volume is drying up everyday right now and I sure don't want to see what spreads would look like if HFT were to disappear. Be careful what you wish for. I believe HFT has aided most investors, including value investors, on a net basis.

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I can only refer to an article on Charlie Munger in Forbes, February 22, 1996. It was the cover story, probably one of the best ever titled: "Charlie Munger: plumbers are useful, money managers aren't"

 

He said: "personally, I think that if security trading in America were to go down by 80%, the civilization would work better. And if I were god, I d' change the tax rules so it would go down by 80%, in fact , by more than 80%". Munger once proposed a 100% tax on gains taken in less than a year from securities trading.

 

Well,... personally I could live with some 50% or even 100% tax on gains shorter than 6 months or something similar, and every tax rate beyond going slowly down over 2, 3, or 5 years to 10%. I would also make holdings after 7 or 10 years, totatally tax free, so to encourage people to save long term for retirement. It would be some perfect system that penalizes short term thinking and encourages responsibilities. I guess such a system would effect me as a frugal investor not at all. Anyway,... unfortunately, it will never happen.

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I don't know how you can claim a HFT algo won't cause a six-sigma event; they already have.  It's just the exchanges and US regulators keep coming through and fixing the outcome.  If two algos go crazy and trade Apple to each other for 1 penny, the exchanges and regulators basically show up and say they weren't real trades.  Let those trades stick and I promise a six-sigma event would have happened by now.

 

I wish I were allowed to cancel my bad trades.

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I can only refer to an article on Charlie Munger in Forbes, February 22, 1996. It was the cover story, probably one of the best ever titled: "Charlie Munger: plumbers are useful, money managers aren't"

 

He said: "personally, I think that if security trading in America were to go down by 80%, the civilization would work better. And if I were god, I d' change the tax rules so it would go down by 80%, in fact , by more than 80%". Munger once proposed a 100% tax on gains taken in less than a year from securities trading.

 

Well,... personally I could live with some 50% or even 100% tax on gains shorter than 6 months or something similar, and every tax rate beyond going slowly down over 2, 3, or 5 years to 10%. I would also make holdings after 7 or 10 years, totatally tax free, so to encourage people to save long term for retirement. It would be some perfect system that penalizes short term thinking and encourages responsibilities. I guess such a system would effect me as a frugal investor not at all. Anyway,... unfortunately, it will never happen.

 

Here-here!

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Some sort of Tobin tax would solve that problem, no need for 100% capital gains tax.

 

Here in Belgium we already have a 'taks op beursverrichtingen' for ± 0,2%/transaction and we are ready to implement Tobin tax when other nations follow.  :-X

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I don't know how you can claim a HFT algo won't cause a six-sigma event; they already have.  It's just the exchanges and US regulators keep coming through and fixing the outcome.  If two algos go crazy and trade Apple to each other for 1 penny, the exchanges and regulators basically show up and say they weren't real trades.  Let those trades stick and I promise a six-sigma event would have happened by now.

 

I wish I were allowed to cancel my bad trades.

 

Technically you are correct, but I think you lack some perspective. Of course it is ridiculous that apple trades at 1 ct,  but it is definitely not a world-changing event. Somebody wrote a bugged program and lost money. Same thing happened before algorithmic trading was around: countless examples of fat finger trades. Fortunately exchanges have rules in place to prevent and cancel idiotic trading. If you piss away a couple of million manually your trades will be cancelled as well.

 

I am not saying HFT is the holy grail, but I believe it receives too much (negative) attention. I guess we need a scapegoat because the market has been flat for 15 years and the evil anonymous robot is perfect for that. IMO, option backdating, corporate fraud, stock pumping, government deficits, and countless other things are far more harmful for investors, but nobody is going to write a nice Reuters blog article about it. Who would read it?!?

 

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I don't know how you can claim a HFT algo won't cause a six-sigma event; they already have.  It's just the exchanges and US regulators keep coming through and fixing the outcome.  If two algos go crazy and trade Apple to each other for 1 penny, the exchanges and regulators basically show up and say they weren't real trades.  Let those trades stick and I promise a six-sigma event would have happened by now.

 

I wish I were allowed to cancel my bad trades.

 

Technically you are correct, but I think you lack some perspective. Of course it is ridiculous that apple trades at 1 ct,  but it is definitely not a world-changing event. Somebody wrote a bugged program and lost money. Same thing happened before algorithmic trading was around: countless examples of fat finger trades. Fortunately exchanges have rules in place to prevent and cancel idiotic trading. If you piss away a couple of million manually your trades will be cancelled as well.

 

I am not saying HFT is the holy grail, but I believe it receives too much (negative) attention. I guess we need a scapegoat because the market has been flat for 15 years and the evil anonymous robot is perfect for that. IMO, option backdating, corporate fraud, stock pumping, government deficits, and countless other things are far more harmful for investors, but nobody is going to write a nice Reuters blog article about it. Who would read it?!?

 

Wide spreads are more consistent with what we want as Value Investors, and what WatsaBuffet thinks he wants in more volatility.

 

Wide spreads are VERY healthy for markets, I don't subscribe to this Chicago School efficient market theory that spreads have to be tight. My best investments were made on equities with very wide spreads. Wide spreads lead to more organic buying and selling, a buyer of a stock with a wide spread generally has longer term intentions, same with a seller...

 

What some of you may be missing is that the HFT Exchange relationship is no different than the Issuer Rating Agency relationship we had in 2003-2008.. This is a very big issue.

 

I remember when NDAQ was trading on the OTC Bulletin Board and nobody even cared about valuing an exchange, all of a sudden the ex goldman guys realized an exchange is a toll road and began to consolidate and extract fees. This for profit mentality of an exchange is not good as it leads to them harbouring HFT and encouraging rapid fire trading in the casino.

 

Exchanges used to be partnerships with seats, now they are pubcos that try to grow regardless of what their underlying business is doing. They lower listing requirements and sell data to some parties while they don't others, the list goes on and on and on.

 

 

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Well,... personally I could live with some 50% or even 100% tax on gains shorter than 6 months or something similar, and every tax rate beyond going slowly down over 2, 3, or 5 years to 10%. I would also make holdings after 7 or 10 years, totatally tax free, so to encourage people to save long term for retirement. It would be some perfect system that penalizes short term thinking and encourages responsibilities. I guess such a system would effect me as a frugal investor not at all. Anyway,... unfortunately, it will never happen.

 

I'm not sure...what happens when you invest in 8-track players? I'm OK with the tax structure the way it is in terms of short/long term capital gains. I think a tax on transactions is a healthier option.

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What some of you may be missing is that the HFT Exchange relationship is no different than the Issuer Rating Agency relationship we had in 2003-2008.. This is a very big issue.

 

I remember when NDAQ was trading on the OTC Bulletin Board and nobody even cared about valuing an exchange, all of a sudden the ex goldman guys realized an exchange is a toll road and began to consolidate and extract fees. This for profit mentality of an exchange is not good as it leads to them harbouring HFT and encouraging rapid fire trading in the casino.

 

Exchanges used to be partnerships with seats, now they are pubcos that try to grow regardless of what their underlying business is doing. They lower listing requirements and sell data to some parties while they don't others, the list goes on and on and on.

 

Exactly and in a key infrastructure sector.  Visa and Mastercard are another two to start worrying about.

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I beg to differ. Daily on-exchange volume isn't that big (and surely an algo can be stopped within a day). Exchanges are extremely transparent, there are circuit breakers, trade cancellations and a lot of regulatory oversight. I think it is extremely unlikely that a bunch of market makers are a "systemic risk". Even the "original" flash crash (which in the end turned out to be a human error) was almost completely negated in two days.

 

The biggest risk in the market are still human participants, causing .com crises, mortgage crises and sovereign crises in the past decade. The flash crash is a non-event compared to those. It just gets a lot of media attention. It is new, we don't understand it so we are scared of it.

 

I beg to differ. Daily on-exchange volume isn't that big (and surely an algo can be stopped within a day). Exchanges are extremely transparent, there are circuit breakers, trade cancellations and a lot of regulatory oversight. I think it is extremely unlikely that a bunch of market makers are a "systemic risk". Even the "original" flash crash (which in the end turned out to be a human error) was almost completely negated in two days.

 

In fact, all HFT firms are essentially in 100% cash at the end of each trading day. They aren't going to cause any six sigma event, let alone a three sigma event, given that they close out their positions very quickly. People forget that the cascading of the Flash Crash occurred due to a lack of liquidity (i.e. HFT disappearing) rather than due to the additional liquidity that HFT thankfully provides

 

Volume is drying up everyday right now and I sure don't want to see what spreads would look like if HFT were to disappear. Be careful what you wish for. I believe HFT has aided most investors, including value investors, on a net basis.

 

Again, you're both equating the trigger with the event.  What I'm saying is that something more significant than the flash crash could create counterparty risk that is significantly greater (virtually dwarfing) the triggering event.  Think of it in terms of the match to the stick of the dynamite...you can easily blow out the match, but what if the fuse is lit and you can't contain the ensuing explosion.  Cheers!

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If that would ever happen they will probably restate the T&C of the derivative contract, rather than blowing up the financial market. Just as they did with the Greek default. Markets are very resilient. I don't think a random flash crash will trigger a financial meltdown. The problem is obvious and easy to solve or sidestep.

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If that would ever happen they will probably restate the T&C of the derivative contract, rather than blowing up the financial market. Just as they did with the Greek default. Markets are very resilient. I don't think a random flash crash will trigger a financial meltdown. The problem is obvious and easy to solve or sidestep.

 

Greek default was $100B...who will take the hits in the restatements if you have counterparty liability of $1T?  You have $20T+ in credit derivatives trading, no one knows exactly what the counterparty risk is and on what.  Even $1T may not be the worst case scenario.  Cheers!

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http://www.nanex.net/aqck/2804.HTML it seems it represent more the amount of quotes than the amount of trades:

 

"It's not high frequency trading (HFT) that concerns us. It's high frequency quoting, and it should concern everyone. ... while trade frequency has stalled and is actually lower than it was years ago.  "

 

http://www.nanex.net/Research/ExhibitA/ExhibitA.html

 

"Quote traffic, like spam, is virtually free for the sender, but not free to the recipient. The cost of storing, transmitting and analyzing data, increases much faster than the rate of growth: that is, doubling the amount of data will result in much more than a doubling of the cost. For example, a gigabit network card costs $100, while a 10 gigabit network card costs over $2,000. A gigabit switch, $200; a 10 gigabit switch, $10,000"

 

"But in those limited contexts where the interests of long-term investors conflict with short-term trading strategies, the conflict cannot be reconciled by stating that the NMS should benefit all investors. In particular, failing to adopt a price protection rule because short-term trading strategies can be dependent on millisecond response times would be unreasonable in that it would elevate such strategies over the interests of millions of long-term investors – a result that would be directly contrary to the purposes of the Exchange Act. "

 

 

 

 

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I haven't yet read it, so I don't know if it's any good, but WIRED has an article that should interest those who are interested in all that high-speed computer trading:

 

 

http://www.wired.com/business/2012/08/ff_wallstreet_trading/all/1?viewall=true

 

And here's some discussion about the piece, with at least one HFT guy piping in:

 

https://news.ycombinator.com/item?id=4360742

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