Tag Archives: high-frequency trading

SEC Wants to Look at Bigger Ticks

By Matt Levine – There’s a social benefit in having liquidity providers who are willing to take risks. The idea is that, in the olden days, NYSE specialists were supposed to step in to keep markets orderly, buying for their own account — at their own risk — when everyone else was selling. This reduced volatility and increased public confidence, as people felt that markets would be stable and they’d always be able to trade at a reasonable price.

That system is mostly gone.

If a stock doesn’t trade very much, then you can’t make very much money quoting it — but you can lose a lot of money if the price moves away from you. So you manage your risk by quoting only small sizes, and moving your quote very rapidly if someone trades with you. Or by just not quoting the stock. So low natural liquidity — low interest from fundamental buyers and sellers — leads to low profits for market-makers, which leads them to be very jittery in making markets. more> http://tinyurl.com/nqytpy9

The battle against the high frequency traders

By Andrew Smith – The algorithms at the heart of this world were run not by finance or programming people, but by “quants”: quantum physicists, climate scientists, theoretical mathematicians.

Some of the most formidable minds in the world were now employed in a technological arms race, a hidden war stalked by million-dollar predator algorithms that could swarm those of the larger, slower players – typically, pension and mutual funds – in the same way a shoal of piranhas might an ox, cutting them to shreds and pocketing the profits.

The regulators couldn’t keep up. If they tried, the algos simply mutated. In the last seven years, the trading environment has changed out of all recognition, spurred largely by the introduction of new regulation at the end of 2007.

Designed to increase transparency, this forced brokers to offer clients the best possible price across all 13 US exchanges, meaning that price information had to be synchronised – a fiercely difficult technical challenge that rendered the market hard to monitor and abruptly brought Einsteinian physics into play, as data raced between exchanges at light speed. more> http://tinyurl.com/nhhelnv

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High-Speed Trading Isn’t About Efficiency–It’s About Cheating

BOOK REVIEW

Flash Boys, Author: Michael Lewis.

By Matthew O’Brien – It’s Wall Street at its most socially useless. HFT (high-frequency trading) funds aren’t allocating capital to where they think it’ll be most productive. HFT funds are allocating capital to where they think other people will put it 50 milliseconds from now. It’s a tax on everybody else. And it’s a tax that has basically no benefit. Sure, HFT funds defend themselves by saying they’re increasing liquidity, but increasing liquidity is the last refuge of bullshitters.

Economist Paul Samuelson [2, 3, 4] had it right all the way back in 1957: knowing (or trading) something one second before everyone else is personally profitable and socially pointless. more> http://tinyurl.com/mkg5643

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