Turning our stock market over to robots probably won't end well
First, a shameless plug: Please go read my latest piece at AlterNet about America's most revolting breakfast foods. From Reese's Puffs to Hardee's Monster Biscuit, these are the most comically unhealthy breakfasts you'll ever find.
Now, onto the more serious business of robots taking over the entire world through the stock market.
60 Minutes ran an excellent piece last night about high-frequency trading:
For those of you who don't know, an estimated 70% of trades on the stock market today are generated by high-frequency trading algorithms that scan market data for inefficiencies, anomalies and the like and buy or sell stocks based on the probability that they'll go up or down in a very short period of time. So let's say Microsoft's stock has been trading down 25% on the day. An algorithm detects that this is unusually low and snatches it up, then trades it three minutes later after its price has appreciated.
The key here is that the algorithms get pricing data milliseconds before human traders do and place orders accordingly. This helps them skim pennies off of stocks millions of times a day, which adds up to big long-term gains at the end of the year.
Let's make this simple by using a sports analogy, or rather a virtual sports analogy. If you've ever played fantasy football, you know that you set your lineup of players roughly one hour before game time and you aren't allowed to change it once the games start. But let's say you're playing in a league that lets you change your roster during games. And let's say a rival player is watching games on an old analog set while you're watching it on Direct TV. As you're following games you notice that your rival is signing and dropping players five seconds before they score a touchdown. Because he doesn't have the five-second delay that you have, he's able to grab players off the waiver wire who have just scored right before the system records the score officially. And at the end of the day, you check your league to learn that your rival has accumulated 5,469 fantasy points in one week alone.
All of which is a roundabout way of saying, "Our markets are completely insane." When 70% of trades are made by algorithms that don't have any sense of a stock's underlying value and are only skimming pennies off the top, we have no idea if price changes are the result of real-world events or if they're just being driven by computers trading with themselves. And what's more, if a firm enters a trade that sets off several algos' alarm bells it can result in a massive flash crash like the one that happened in May.
I'm not sure of very much in this life, my friends, but I feel pretty confident that turning our stock market over to robots will probably end badly for most of us.
http://www.youtube.com/watch?v=VXa9tXcMhXQ
Diabolus est Deus Inversus
It's the machines taking over.
Like a bad movie plot but in real life.
I do not think it has a happy ending.
**** Great piece at Alternet BTW!
"I know that there are people who do not love their fellow
man, and I hate people like that! " ~ Tom Lehrer (1928 - )
http://www.youtube.com/watch?v=t_fvX242KTU
Diabolus est Deus Inversus
will be devoured even faster
grasping, greedy traders?
“The greatest evildoers are those who don’t remember because they have never given thought to the matter, and, without remembrance, nothing can hold them back,”
could they be any worse?
.. and it's much much worse!
When will government of the people, by the politicians, for the corporations perish from this Earth?
Not soon enough!
away with one or the other.
the machines we can re-program.
“The greatest evildoers are those who don’t remember because they have never given thought to the matter, and, without remembrance, nothing can hold them back,”
It doesn't know fear, it doesn't know pain, and it absolutely will not stop until you, America, are dead.
Turning our currency over to a private corporation didn't end up to well either.
"Great minds discuss ideas; average minds discuss events; small minds discuss people." ~ Eleanor Roosevelt
the easy way to get rid of this is to put a nominal tax on a trade, or high taxes on gains from very short term trades, in order to discourage this type of behavior.
even a tiny tax - one one hundredth of a percent - would accumulate enormous revenue at the same time it would dampen the robot trades.
When will government of the people, by the politicians, for the corporations perish from this Earth?
Not soon enough!
"At the Root of the Crisis We Find the Largest Financial Swindle in World History", Where "Counterfeit" Mortgages Were "Laundered" by the Banks
http://www.washingtonsblog.com/2010/10/at-roo...
"Great minds discuss ideas; average minds discuss events; small minds discuss people." ~ Eleanor Roosevelt
Don't you have the analogy backwards?
The guy on the old analog set would be at the disadvantage, right?
When will government of the people, by the politicians, for the corporations perish from this Earth?
Not soon enough!
No, there's less delay on an old analog broadcast than there is on a Dish receiver.
The analogy makes the point right.
It just doesn't make the right point. ;)
The fantasy sports analogy doesn't work at all. It's not that trading algos are getting a sneak peek at the data, it's that they can process it many thousands of times faster than a human can.
Every trading algo, no matter how sophisticated or dumb is executing on behalf of a human trader or investor. It's not people vs. machines with the robot team reaping all the reward - it's people competing with each other and using robots as tools. Even a regular Joe Blow investor can unknowingly benefit from multiple algorithmic trading systems when entering an order from an online trading system.
1) Some validation will be done to see if the investor can afford the trade.
2) Validation is done on the pricing, too.
3) A router looks at dozens or hundreds of possible places to fill the order and breaks it up and sends it out to get the investor the best price.
4) Each individual market that receives a portion of the order checks its current price against the order books of other markets to make sure that this trade can happen without missing a better price elsewhere.
5) All of the fills are assembled back together and the result is relayed back to the investor.
This is just for a little trade like "Buy $2000 of MSFT". The mutual fund or index fund you hold has much more sophisticated stuff going on all of the time in markets all around the world.
A better analogy than the fantasy football game is a fly-by-wire system on a modern plane. The pilot provides input via stick, throttle, and rudder controls, but the avionics make the millisecond-by-millisecond decisions that actually move the control surfaces.
There are MANY systemic problems in the world of trading & investing, but HFT helps more than it hurts. The real problems are fraud done by humans, not HFT's efficiently executing trading strategies.
Mary Schapiro, Chair of the SEC: "These high frequency trading firms can generate more than a million trades in a single day and now represent more than 50 per cent of equity market volume. And many firms will generate 90 or more orders for each executed trade. Stated another way: a firm that trades one million times per day may submit 90 million or more orders that are cancelled."
to which pam martens writes:
"What’s the science behind cancelling 90 orders to get one trade done? If you blast out millions of orders in microseconds, then cancel them just as fast, you are confusing your competition as to what your true intention is. Your competition learns from this and fires a similar volley back at you. (Left in the blaze of digital ticker tape is the average investor, who doesn’t own a trading algorithm.) Questions are being asked as to whether some of these practices may constitute market manipulation, similar to painting the tape, where the sole purpose of the order is to mislead the market. If retail stockbrokers tried doing this for the small investor, they would be expeditiously led off in handcuffs."
http://www.counterpunch.org/martens10042010.html
i wouldn't call this a fair and efficient way to allocate capital to spur the economy
HFT 'helps more than it hurts'? Perhaps you are a smidge premature with this assertion, Syscrush?
Our economy is grinding to a halt (lo, these many years after St. Ronnie's corporatist-driven disaster). And, since ours is a global economy, the fallout will be global.
The uber wealthy elites labor on under the delusion that their wealth will protect them, since--historically--this has been true. However, the ravages of radical income inequity have motivated a burgeoning number of the hoi polloi to say "WTF?!" and "I'm mad as hell, and I'm not going to take this anymore!!!". The less than 400 corporatists who own and control more than 45% of the world's resources--and the 1,011 billionaires who jockey each year to grab the brass ring of membership in that inner circle--will be defenseless against the billions of people worldwide who FINALLY recognize that it's time for catastrophic change.
The uber wealthy elites' fundamental mistake has been to underestimate the hoi polloi. We have both the courage and the fortitude to pursue an equitable alternative to the giant ponzi scheme known as capitalism. And, we can smell a pile of manure when it's placed directly in front of us, eg. the high frequency trading (Brewster's Millions, anyone?). Knowledge is power, and KNOWING about HFTs is the first step in saying no more!
Trading done by computers based upon research (aka humans or higher order algorithms) is one thing, but HFT has nothing to do with that. All it does is use colocation and statistical analysis to determine if there is a statisically significant anomoly in a given stock's price, then act accordingly. And by colocating with the stock exchange servers, it is able to execute those trades miliseconds faster than people or machines actually making decisions about what to buy or sell based upon the fundementals of a company. It doesn't actually add value to the market or help to more accurately value companies, all it does is skim profits off the top of the market by taking advantage of lower information latency than average traders.
Computers don't make trades
People with computers make trades?
Before enlightenment - chop wood, carry water. After enlightenment - chop wood, carry water.
for HF trading. Is it simply because someone can make money doing it? That it's not technically illegal?
Isn't the market there for the purpose of providing resources to companies and investments for shareholders? I think we can agree that a two or five minute investment isn't really an investment at all, it's simply gaming the system and the methods of other investors.
Non HFT traders can benefit from HFT's - they provide liquidity and stabilize prices across markets and across time. It seems unintuitive, but they tend to have a smoothing effect on the prices that people see most of the time.
Really, there's no such thing anymore as an order that doesn't have some algorithmic or HFT component. Either the broker or the market executing the order is using some kind of algo, or the trader on the other side is.
And it's not different from ABS or traction control on a car.
The important fact is that we cannot see these trades happening. No one knows who they are. As the senator notes, at this juncture, there is a serious issue with transparency.
it's all a series of tubes...
You're not explaining yourself well so I'm not sure if you have a point. The exchange and the SEC knows the identity of everyone who is making the trade. Are there a type of trade that you can "see" happening? It's not like there is a physical relic representing a stock like some sort of poker chip that traders are pushing around a table in little piles.
a) impose a per share transaction fee
b) bring back a higher, short term capital gains tax, or
c) introduce an even higher, micro-term capital gains tax.
This would have a dampening effect on market liquidity that would actually hurt small investors.
Look at some of the commodities markets, such as oil. You might not be able to make a decision to buy or sell with anything more than yesterday's closing price. This leaves a huge gaping opportunity for more powerful investors with slightly better knowledge to game you, the small investor.
With HFT, your trade gets rolled up with millions of other trades and happen immediately at the time and price that you expect. The reason for this is that there are always millions of buyers and sellers at any moment in time that can easily accommodate a trade by a human investor. This is how trading services like Scottrade or Fidelity work, so small investors do benefit from HFT directly.
Liquidity is really important to markets. The more HFT shops that come into play, the less profit there is per trade, but the more liquidity they add to the market. In theory the profits will die down where the revenue on the trades just offsets the cost of operating all of those powerful computers. It helps create the semblance of a perfect economic market where every investor has access to complete, identical information upon which to make up their minds.
To say that robotic trading probably won't end well is an understatement. Sure, it'll be great for the big investors who'll buy and sell in large quantity based on tiny ups and downs, and ratchet up their profits, while destroying the value of stocks for real people who invest for other reasons.
It hastens the end of the day when people who actually THINK about what they're investing in, what companies they think deserve stockholder support because of some intrinsic value in what the company makes or how the company is run.
It's nothing new, though, that our economy increasingly is based on such shit.
If you're an investor who values companies and holds them long-term, then HFT has absolutely nothing to do with you.
Fewer and fewer people invest, the market is moving more and more to what used to be called day trading but what has become minute-, second-, or millisecond-trading. However, Warren Buffet keeps making more money year after year than the ADD trading crowd and he does it by investing in stuff he understands and believes in.
has been going on a very long time. Computer induced panics and people induced panics have this difference: the computer ones are easier to catch and stop. To me this is six of one and a half dozen of the other. RonD's ideas above aren't bad if one could solve the jurisdictional issues.
Hasa Diga Eebowai
http://3.bp.blogspot.com/_OVXLr0-qGkY/Sz4VKPM...
Diabolus est Deus Inversus
The house always wins. We are not the house.
Ok, that's two things but remember them both well.
It's all a zero-sum game for us plebs. That's what TPTB hope for us in the end: zero.
http://www.youtube.com/watch?v=0ccKPSVQcFk&fe...
http://www.youtube.com/watch?v=GzINI3au9q0&fe...
Diabolus est Deus Inversus
Trinity: A déjà vu is usually a glitch in the Matrix. It happens when they change something.
Morpheus: We don't know who struck first, us or them. But we do know it was us that scorched the sky. At the time, they were dependent on solar power. It was believed they would be unable to survive without an energy source as abundant as the sun.
Agent Brown: Perhaps we are asking the wrong questions.
I belong to no organized political party -- I am a Democrat.
--Will Rogers
http://www.youtube.com/watch?v=iqbNC3GMfpM
Diabolus est Deus Inversus
but by what legal mechanism are these algorithms able to obtain trade data before humans receive it? there are only two ways this could be accomplished: 1. the exchange's computer system is being hacked, by the computers of those running these applications. that would be (i do believe) illegal. or, 2. the exchange has given free access, to those who are running these apps. that would be insider-trading, also (i believel) illegal.
either way, a crime is being committed, allowing the users of the computer-based apps an unfair (and, i believe, illegal) advantage over everyone else. so, the question is, why isn't the SEC investigating this?
You are correct that in order for the computers to get unfair access to the market data would require a crime.
Which is what makes this article sloppy reporting. The trading algorithms can act on the data faster than a human, but they don't get the market data any sooner than their competitors.
They actually do. By colocating thier servers in the same datacenters as the machines that actually execute the trades on the exchanges, they manage to get the data miliseconds sooner (due to lower network latency from being fewer hops away) than other traders. It's like the difference between a trader that watches the ticker on the exchange floor vs those that wait for the paper every morning. Lower data latency means you can act on the information sooner, and thus edge out competition.
Rep. Alan Grayson: "Has the Federal Reserve Ever Tried to Manipulate the Stock Market?"
Google plunge protection team
Study the symptoms not the virus...
The Working Group on Financial Markets (also, President's Working Group on Financial Markets, the Working Group, and colloquially the Plunge Protection Team) was created by Executive Order 12631, signed on March 18, 1988 by United States President Ronald Reagan.
Study the symptoms not the virus...
... where nothing can go wrong... go wrong... go wrong... go wrong...
It's fine to put machines in control of our financial futures.
The line must be drawn at professional sports. NEVER can machines be put in charge of things that REALLY matter and have an impact on people's lives.
Vote GOP and move forward to the 18th Century.
needs to be shown the algorithms. Then, trades must not be allowed to take place until SEC approved algorithms are in use.
The unintended operations (05-06-10) discussed are a sign of poor testing so safeguards need to reside within or upon the algorithms to act as a brake.
When high frequency investors have to call the quants over losses from bugs, hell will pay for itself.
Ask any DSL provider if a customer living farther or closer to a server/switching station will see diferent speed results.
A faster computer??? Kind of reminds me of the "snipe" statagy often used on ebay.
Study the symptoms not the virus...
Goldman Sachs Punked? The Case of the Stolen Proprietary Algorithm
Study the symptoms not the virus...
I welcome our algorithmically superior financial overlords.
If only their rule had been extended to the mortgage markets.
Vote GOP and move forward to the 18th Century.
I'm finally getting Robot Insurance!
"synthetic financial instruments" being traded by "artificial legal entities" who the hell knows? could be beets, could be carrots?
there are people who own these machines, and it is they who control the machines and pocket the profits. this is just the high tech version of screw the proles, just forget whack-a-mole, let's move straight to whack-a-prole, inject a little honesty into the program.
neither political party gives a damn about the working class, it is all just crowd control.
Truer words were never spoken--or written. I'm stealing this, okay?
It sounds as though the computers have taken over the role of "Market Maker".
Al Gore got rhythm?
Diabolus est Deus Inversus
... is John Stewart's brother. I kid you not.
The stock market does not work without human delay and intuition. It was never meant to work this way.
They are creating a hollow house of cards.
They have exploited the market because their trade volume slows the market computers enough so they know before everyone.
Why do you think being closer when information traveling at the speed of light helps them?
On top of all this, when someone buys a large number of stock and increases the stock trade volume they make the price higher so the computer then sells it right away making that sliver of profit.
Ars Technica have been watching HFT for a while now - they covered the flash crash in the last few weeks actually. quite disturbing reading when you see just how small of a glitch can screw up the market through the fact it is simply moving so fast. worth a read if you wanted to dig further.
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