Must read article in Spetember edition of Wired Magazine on How Wall Street Got Addicted to HFT. In light of the JKnight Trading snafu, Wired decided to post it on line earlier than suual.

Here is an excerpt:

“Faster and faster turn the wheels of finance, increasing the risk that they will spin out of control, that a perturbation somewhere in the system will scale up to a global crisis in a matter of seconds. “For the first time in financial history, machines can execute trades far faster than humans can intervene,” said Andrew Haldane, a regulatory official with the Bank of England, at another recent conference. “That gap is set to widen.”

This movement has been gaining momentum for more than a decade. Human beings who make investment decisions based on their assessment of the economy and on the prospects for individual companies are retreating. Computers—acting on computer-generated market trend data and even newsfeeds, communicating only with one another—have taken up the slack. Conventional economics views all this as an unalloyed good: It is axiomatic that all trades are a net benefit to the economy because they enhance “liquidity,” the ability of investors to buy or sell assets at the best price. Indeed, in 2007 the SEC instituted an ambitious new rule, the national market system, that opened the door to dozens of new venues for stock trading, but now that transaction times are measured in micro­seconds and prices are carried out to six decimal places, those opportunities have arguably gone past a point of diminishing returns.”

Go read the full article . . .

 

Source:
How Wall Street Got Addicted to Light-Speed Trading
Jerry Adler
Wired, 08.03.12
http://www.wired.com/business/2012/08/ff_wallstreet_trading/all/

Category: Quantitative, Really, really bad calls, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “Buy Neutrinos”

  1. Bob is still unemployed   says:

    More info on the under-construction New York to London fiber link that will save the HFT traders 5 milliseconds.

  2. Ramstone says:

    Or we could, you know, just CBO? to NYC?

  3. Ramstone says:

    …err, move CBOE/T to NYC. Sure, some Notre Dame grads might screech a bit…

  4. Frilton Miedman says:

    Free market, natural price discover?…so Passe, the real function of the stock market is to get money out of the hands of small traders and put it into the hands of the best, fastest cheater.

    That’s how you “provide liquidity”, good stuff for the economy.

  5. VennData says:

    Well… so I can use the Chicago/NY Semaphore Line I’m constructing to do back office ops then?

  6. rimzolito says:

    all i do is laugh at this blog of old timers that don’t understand market making and HFT trading, for a start the majority of them are not momentum or trend based…..

    so keep complaining, and keep losing

  7. Kim53 says:

    uh, we’re all effed.

  8. ironman says:

    It’s all part of the future economic advantage to being in the middle of nowhere.

  9. mrg says:

    I honestly don’t care if the morons using these algos all go to hell in a handbasket- as long as they don’t take the entire global financial system with them. Of course, this won’t happen. we’ll be forced to bail them out again.

  10. rimzolito says:

    http://www.cis.upenn.edu/~mkearns/finread/marketmaker.pdf

    - this is a review of HFT market making model developed using ideas from stochastic decision processes/dynamic programming

    - this is an example of a model that does not assume risk, but instead competes for liquidity rebates from the exchanges. these types of models depend on the super fast connections described in this post

  11. rimzolito says:

    and since BR refuses to post anything but a one-sided argument on HFT, I will try to make up for the deficiency

    http://www.highfrequencytraders.com/blog/909/hft-not-responsible-market-volatility-%E2%80%93-you-are

    any comments would be great

  12. DeDude says:

    They need to institute a random delay of 1-3 seconds in execution of at least half of the trades. This way the HFT algos are at a loss, and this kind of destructive sociopathic behavior will stop. Society has absolutely nothing to gain and way to much to lose from HFT to allow this to continue.

  13. Frilton Miedman says:

    rimzolito Says:
    August 8th, 2012 at 1:39 pm
    “all i do is laugh at this blog of old timers that don’t understand market making and HFT trading, for a start the majority of them are not momentum or trend based…..

    so keep complaining, and keep losing”

    ~~

    You’re an idiot.

    Manoj Narang, CEO of Tradeworx, on Fast Money halftime yesterday – no longer selling traders the idea of p”providing liquidity”, but instead blatantly telling the staff (FM traders/hosts) and viewers that human traders are now obsolete, that anyone trading short term is going to lose to HFT’s – period.

    And still, folks like you persist insisting that HFT is “the future” of fair trading.

  14. rimzolito says:

    - I am a short term position trader, and I am part of an independent trading group that has short-term position traders that have made money for 20+ years

    - forward me a link or something to Manoj Narang’s comments

    - how do you interpret my last link?

  15. Arequipa01 says:

    microwave signals require significant precision sighting between towers. if a vandal were to take out his/her potato bazooka and lob a spud at a transponder, say a few minutes before the Dept of Energy releases its oil numbers (as happened this morning), that may have a deleterious effect on trading…

  16. rimzolito says:

    because this is the stuff he usually says:

    Manoj Narang, CEO of Tradeworx, a high-frequency trading firm, said the market would still function fine without Knight, if it has to.

    “Markets are a battleground; it’s survival of the fittest,” Narang said. He compared the activities of Knight and other equity brokerages to driving a car: Sometimes there are accidents, but “that doesn’t mean we should all stop using automobiles.”

    Read more here: http://www.kansascity.com/2012/08/06/3745573/knight-capital-says-it-has-400m.html#storylink=cpy

  17. more *Proof that ‘Trading’ should be done ‘by Appointment’..

    differently, ‘The Market’ would be fine..Open every other Day, for ~4 hours..

    then, maybe, some *real Work could get done–you know, like.. http://www.infrastructurereportcard.org/ gives rise to..

    but, hey, who ‘needs’ Water, when We can have ‘putes “Trading”, right?

    http://www.awwa.org/Publications/StreamlinesArticle.cfm?ItemNumber=47298&showLogin=N

  18. Arequipa01 says:

    http://en.wikipedia.org/wiki/Spud_gun

    pretty soon the potatoes will be behind the counter with the sudafed…and yet there is no lack of crystal meth…odd that…i wonder if McDonald’s will soon be doing biometric/iris scans when you buy a super-sized combo of fried animal collagen (read fingernails and pig chuckles) and cardboard

  19. Frilton Miedman says:

    Rim, insult begets insult, stop insulting oppositional views and let’s have a discussion.

    I am NOT saying there is no benefit to HFT, I AM saying HFT’s use extremely unfair advantages, sub-pennying, price/volume bluffs, flash orders and other nefarious means to glean info on positions held to use against smaller retail traders – see this white paper by Joe Saluzzi – http://www.themistrading.com/article_files/0000/0554/THEMIS_TRADING_White_Paper_–_Data_Theft_On_Wall_Street_–_05-11-10.pdf

    Also noteworthy, the blacklisting by CNBC for anyone who tries to expose HFT, BR and Joe Saluzzi are no longer regularly guest speakers, be it coincidence, I don’t know, but to hear an HFT CEO no longer selling traders the “liquidity” theme, instead, now blatantly admitting that WE WILL LOSE, is an eye opener, especially where Mr Naranj openly boasted of working with the SEC to write regulations for HFT.

    Here we go again, another BS PR blitz selling us a pending market crisis wrapped in fools gold….brought to us by the same SEC that allowed Madoff to write the regulation that allowed to to steal billions.

    .

  20. zdog says:

    Institute a per trade fee. Heck even $0.01 might do the trick. Compare that to something like Visa’s per transaction fees that the little guy pays every time a customer swipes a card.

  21. just-sayin says:

    zdog…I think a more appropriate charge would be for every order placed in the market not just completed trades.

  22. kaleberg says:

    HFT is just a wire scam, a hoary chestnut of a con. They used it in The Wire, The Queen of Hearts, and dozens of other movies. When the trading by all parties is done at computer speeds, whoever gets the market data first can scam anyone with a slower link. Playing the wire doesn’t need much of a wire delay to work. It just needs one extra cycle of reaction time.

    Usually the wire is considered part of a long con, that is a confidence scam that requires a bit of set up before the actual con goes down. If you think of the existing financial system and the zero integrity stock exchanges as part of a long con, you would not be surprised in the least that firms are addicted to it. Despite all the “one more big score and I’ll retire” talk, con men are addicted to the money and the excitement.

    (As more traders realize just how this works, I’m expecting to see a lot more transaction unwinding. It will be like Shroedinger’s stock trade where your buy or sell order is in superposition, both executed and not executed, at least until you try and get your money out. This is what you get for hiring physics PhDs to design your trade strategies.)