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Under the headline, "The Wolf Hunters of Wall Street", The New York Times Magazine is running this review of a new book. It tells a long story that ends in the creation of IEX (Investors Exchange), a new stock exchange with the intent of bypassing the unfair advantages that co-located high-speed traders currently have. After a few weeks of operation near the end of 2013, their volume was larger than AMEX(!!)
Here's a quote from near the end of the book review:
IEX had made its point: That to function properly, a financial market didn't need to be rigged in someone's favor. It didn't need payment for order flow and co-location and all sorts of unfair advantages possessed by a small handful of traders. All it needed was for investors to take responsibility for understanding it, and then to seize its controls.
"The backbone of the market," Brad Katsuyama (President & Chief Executive Officer, IEX) says, "is investors coming together to trade." While the article is long, I enjoyed the story. I have no connection to this company, but here's their website.
(Score: 1) by WanderCat on Wednesday April 02 2014, @04:50PM
I am not sure what "new ideas and technologies" you're referring to.
HFT is the next generation of technical trading, in which buy/sell decisions are made based on statistical analysis of price and volume trends. This is utterly apart from fundamental investing, in which buy/sell decisions are based on the basic value proposition of the organizations whose equities are being traded.
Being able to attract capital on an improved/improving value proposition is a welcome driver of economic improvement. Technical trading is a (n increasingly effective) method of gaming the system to make profits on the side. The problem is that this, in most cases, leads to markets which are less stable and less prone to promote real growth.
The current practitioners of HFT are akin to poker players who, on arriving at the casino, agree to pay the casino owners a cut of their winnings in exchange for being able to see other players hands before the end of the hand. The faster your ability to survey market activity, the more players hands you get to see before deciding how to bet.
All in all, an unhealthy development.
But, the emergence of new exchanges that prune out elements who do not contribute to value in the long term is a sign of hope. (And, exactly what one would expect in a properly functioning market.)
(Score: 1) by khallow on Wednesday April 02 2014, @05:22PM
The problem is that this, in most cases, leads to markets which are less stable and less prone to promote real growth.
There is no such problem. Seriously, the best evidence for this case are some small flash crashes and all the near clueless internet commentary on how bad HFT is.
The current practitioners of HFT are akin to poker players who, on arriving at the casino, agree to pay the casino owners a cut of their winnings in exchange for being able to see other players hands before the end of the hand. The faster your ability to survey market activity, the more players hands you get to see before deciding how to bet.
They don't have the ability to see orders or trades before they hit the market, unless they happen to be the broker managing those orders or trades. That conflict of interest is a different problem than HFT and it's been around long before HFT.
(Score: 0) by Anonymous Coward on Wednesday April 02 2014, @05:44PM
HFT distorts real value by interjecting yourself as a middle man by creating false scarcity.
What? Lets say I say I am going to buy at 10 and you can front run me and buy everything at 9.99. Now I can not buy at 10. But you put your sell up for 10.01 and I have to buy because my customer demands it. You have artificially distorted the market price. When the original buyer and seller would have been happy at 10.
They don't have the ability to see orders or trades before they hit the market
Yes they do. Because you submit to 10 exchanges at once. I can watch all 10 and see when they go up and in a few ms make a decision to do the above. You do not even know it happened. Because you are too far away.
That is why this 'hack' they did works to an extent. They are timing their buy/sell to show up on all 10 exchanges at the same time. Instead of being staggered out. All of the exchanges have the same information at the same time so you can not see my buy show up on one exchange and then gobble it up on all the other exchanges before I get there.
That is but one aspect of what HFT is about. It is why all these guys want to be on the fastest network. A 5-10ms is enough for me to get ahead of you in line at another exchange...
(Score: 1) by khallow on Wednesday April 02 2014, @08:25PM
Ok, how is real value being distorted? In your example, you were willing to buy everything at 10.01, and everyone else was willing to sell at 9.99. Everyone got what they wanted including the HFT trader.
Except that the whole story was about them noticing that it happened. And when they actually came up with a program that traded at the same time on all the exchanges rather than submitted at the same time, the HFT advantage went away. "ms" also refers to milliseconds not microseconds. Googling around, I gather "ums" would be acceptable as an abbreviation for microseconds.
This whole HFT strategy works because a big trader is doing something predictable on the time scales that HFT works at. It's knowledge that gets used by the markets.
And it's only a problem because you're only presenting it from the viewpoint of the other parties to the trade. Everything works just fine from the HFT trader's point of view.