Voluntaryist Reader: Is High-Frequency Trading Detrimental to Markets?

Miscellaneous Current Events
21

It is hard to compete against big players in seeking generic stat arb oportunities in the microstructure of the marketplace, since they have so much more resources to find and seize them.

But it’s not impossible, if you happen to have a very original idea.

And of course, it’s not also the only way to make money trading.

If you have better understanding of some sector of the market and can identify when something is being undervalued, you can always seek profits there.

Austrian economists claim the interest rates are off, and this is the cause of many long run disturbances in the markets.

Well, if that’s so, it should be possible for some austrian trader to put some skin on the game and make money using such perceptions.

That seems to be what uber-bearish oddballs like Mark Spitznagel, Nassim Taleb, Jim Rogers and Peter Schiff do, or at least what they want others to think they are doing.

22

Isn’t there some small fee the index charges for any trade? It seems to me hft would be impossibel if the index charged a nominal fee for each trade. How do the indexes make money? If they charged a penny per trade, hft would be less an issue.

23

To Anenome, there is a fee per trade (not per units of stock traded), several dollars, plus a commission of the entire amount of funds moved. Always. No matter if gain or loss. That is why if you trade but get less than around 30-40 per cent profit, you are below the bottom line and lose money even when it appears you gained money.

Next.

ToxicAssets asked why many people who defend HFT don’t engage in HFT. I already answered the question. I’ll say it again, YOU NEED TENS OF MILLIONS OF DOLLARS TO PLAY WITH OR YOU WILL LOSE MONEY! Don’t have it then don’'t do it. The risk is high because the computer is the one that makes errors and sometimes wrongly identifies when a trade is possible. In that case, you will lose lots of money because you had to invest lots of money to get any reasonable gain. Remember, you need millions of stocks, else penny per stock is nothing and exchange transaction fee + commission places you below the bottom line: exchange transaction fee + plus commision is not a few pennies.

They are beneficial if you actually have the resources to engage in them; otherwise, stick to regular stocks, because your effective demand (I want a helicopter, but I can’t pay for it, so I’m not on the demand curve for helicopters and can’t trade money for helicopters since I don’t have any money) is too low to enter the HFT market.

If you having nothing to give in exchange for something else in a trade, then of course you can’t trade and won’t benefit by trade, SINCE YOU ARE NOT IN FACT TRADING.

Like the old Soviet anecdote: the store has lobsters for 1 ruble, but they are very small, and other lobsters for 5 rubbles, but they are very large, so what should I choose! Oh, I can’t make up my mind! Now, if I actually had 5 rubles, I don’t even have 1 ruble …

Finally.

ToxicAssets seems to be entirely suffering from absence of training in and lack of understanding of the method of science. He or she seems to believe there is neither such thing as science no objective true, that every description of a dynamical system has some AGENDA. (This is easily shown to be nonsense: because the proposition “truth does not exist” is either true, in which case it is false, or false, in which case it is false. Proof by dilemma, the opposite proposition, “true does exist” is necessarily true. Thomas Aquinas … )

It’s a mathematical question of utility maximization, given the preferences of both parties. Science describes the behavior these people would have to follow to satsify THEIR OWN goals, WHATEVER THEY ARE. Observe. IT IS INVARIANT TO CHANGE OF PREFERENCES.

IF it is voluntary exchange of things, which is the case IF AND ONLY IF the two parties have opposite preferences OTHERWISE they would keep what they have, THEN it is preferred over the alternatives by the two parties, OTHERWISE they wouldn’t have done it. The preferences of the observer do not enter in the equation, which is an IF … THEN … proposition, which is true by proof by contradiction.

IF by hypothesis A = B, THEN AC = BC, BECAUSE C = C, OTHERWISE AC ~ BC, which would imply that C ~ C, which is a contradiction, or A ~ B, which is contrary to hypothesis. THEN … is an objective inference, necessarily true, because it is literally identical to the initial conditions.

In this case, the only initial conditions are that TWO PEOPLE HAVE DIFFERENT PREFERENCES AND MEET. Then objective inference, that they shall trade and be better off FROM THEIR OWN PERSPECTIVES, is identical to that premise, hence implied by it and true whenever the premise is true.

Therefore, as HFT is a kind of trade, so it BENEFICIAL FROM THE PERSPECTIVES OF THE PEOPLE WHO TAKE BOTH SIDES. As an observer, I merely describe the situation, my own preferences don’t enter in to the equation.

To show that what I said is not correct, you must falsify the premise and prove this “everyone’s preferences are identical.” In that case and only in that case trade is not beneficial every time from the perspectives of the people involved. But is this really the case?

This is as trivial as it get.

All science is objective, as is logic-mathematics, too, positive, instead of normative. There is no agenda, any more than the equations of special relativity describing identity of diagonals or rigid bars during coordinate shifts have any agenda or the mass of some sub-atomic particle being such and such is some agenda.

24

An index is just a bundle of stocks or other securities whose value is a weighted average of the individual components.

It’s just one of the papers that can be bought and sold.

The major players are the individual investors, the mutual or hedge funds and the investment banks, the brokerage firms, and the exchange itself, as well as the clearing houses and the governmet agencies that survey and regulate the activities.

The investors are the easier to understand. They make money by buying low and selling high, or by owning dividend paying shares.

Investment banks also provide services for clients, like writing exotic derivatives and swaps, or planning an public offer or a merger or a takeover or a block liquidation for a large investor.

The broker acts like a bookmaker. The investors usually contact a broker when they want to buy or sell something, because it’s not always possible to directly find a counterpart to a given trade.

He tries to earn a profit by balancing the sell and buy side of his accounts through the setting of a spread (difference between bid and ask).

They also make money by charging trading fees, but they are usually very low or zero for institutional traders, and through loans of securities to be used in short sell positions.

There are also clearing houses and firms, that guarantee counterpart risks for some deals by setting up accounts and margins deposits for participants in transactions that will be netted in the future.

The trading facility, or exchange, is the company that lists all these peoples and the papers they trade, and set the rules of engagement, and provides all sorts of public interest information. Some services are free of charge and others are payed for. They are the hosts of the party. They can also shut down the system for a while, when things become too weird and chaotic and people start jumping out of the windows.

Trades can take place in a traditional trade facility, where companies and commodities are listed and all trades are quoted.

Or trades can be done over the counter, through direct arrangements between parts or in alternative trading facilities, like multilateral trading facilities where rules for quoting limit orders are different.

A good deal of HTF action goes on inside some of these MTF, specially those that with lot’s of trading privacy and where orders are automatically and anonimously routed by matchmaking algorithms, a.k.a. dark pools of liquidity.

25

I meant ‘exchange’ I just couldn’t think of the word right then.

I’ve actually held a series 6 and 63 in the past, so I’m fairly knowledgeable… despite my failure to remember the word and being too lazy to worry about looking it up right then :stuck_out_tongue:

26

why would a person volunteer to lose money due to lag in a system?

let the systems set up their own rules, some may be against hft, and those that break the rules would be cheating and not trading.

27

Not so sure I have asked that.

I, for one, defend the use of modern brain surgery by certified physicians but I’m not sure it would be a good idea for me to try it myself.

I’m quite sure I never disputed any of that.

What I said is that the trades taking place in formal exchanges aren’t simple agreements between the seller and the buyer of the asset being traded, but they have to comply to a general framework that affects a lot of other people, including those running the exchange itself.

And if, for whatever reason, these people consider that HFT is detrimental to their business, they will look for ways to hinder its use, even by other traders.

It’s like playing poker. On most tables, you can’t show your cards to another player during a hand or lend him money to make some bet. “This isn’t Nam, Smokey… there are rules.”.

If you wanna play with the other kids you will have to follow their rules too.

Maybe most traders don’t like HFT techniques because they can easily manipulate the market before everyone else have enough time to know what’s happening. I don’t know, but it’s possible they think that way and because of that they decide to ban it.

I’m not particularly attacking it, by the way. I worked on market microstructure noise, order book modeling and arbitrage and smart routing at some point, and if anything I really dig HFT.

But some exchanges, like NYSE and Euronext for instance, don’t like us doing certain things, and if they decide to ban us that’s life. It’s like being banned from a casino because you happen to know how to count cards on Black Jack. It’s a cost of doing business…

You can stick to your simplified view of the universe if it pleases you, just try not to distort what I’ve said to fit whatever straw man you are used to target.

28

Well, that’s probably true, I tend to be very stubborn and I dislike complicated stuff like “method of science”.

A given scientific description might very well have an agenda if you consider the people engaged in elaborating and publicizing such a description.

Sometimes the agenda of the scientist and popularizers is to propose the solution of a problem that is interesting to other scientists in the community, or to propose new problems without solution that might be interesting to look at.

And through the posing and solving of problems that are linked with the understanding of how things work that science and technology advances.

But sometimes our lack of understanding of a topic may create opportunities for pseudo-scientific expositions that elaborate confused and nonsensical pseudo-problems and pseudo-solutions, and create an illusion of genuine science.

And when these things are too complex these illusions can last for long.

Most of the time, it’s not conscious malice, but the fact that these scientists are themselves victims of the appeal of the misconceptions they invent.

In economics there are many examples of this pattern.

And even though I cannot say for sure, one good example still alive of this seems to be the whole hysteria about global warming.

29

As much as I love these metaphysical quagmires, I really don’t have the time.

Just consider that these things can be a little more complicated than that. When you have purely abstract self-referential statements you can have “necessary truths” but also paradoxes (like “this stament is a lie”) that shake the whole logical structure that you’re trying to build.

It’s something known even before Aquinas, or Aristotle for that matter. They were first considered by the ancient greek sophists. These foundational problems with logics were eventually better understood due to the modern works of Frege, Russel and Whitehead, Wittengenstein, Tarski and Godel.

And this goes for formal logics. Because the epistemological relationship between formal concepts and concrete phenomena is a whole other can of worms. There lies the ancient problem of induction, and the general epistemological attitudes defended by several schools of thought regarding this problem are manifold.

The mainstream tradition however is the perspective intiated by scottish lumieres, specially Hume, and further expanded into the negationism perspective by Popper in the XX century. In very short form, they say you can never positively prove some theory, you can only try to falsify it somehow.

But it’s generally assumed that any relationship between formal models of abstract concepts and statements and the real things they try to represent can never be proven logically “true”, and the only thing we can strive for is approximative correspondence and comparative performance between alternative representations for a given phenomenon.

But even this epistemological attitude is a belief that cannot be proven. It’s an infinite game of recursion and abstraction as you can see.

These things are hard as fuck and many people went insane from attacking such problems directly.