Robot Wars Hit Wall Street
By Ryan Goldberg Jul 14, 2009 1:50 pm
Firms stockpile arsenals of technology to annihilate the competition.
Why, you ask? Because computers are now running the economic show, and they -- like the Terminator's eponymous robots -- seem to be engaged in a pitched battle to the death.
Dramatic market moves have become commonplace, and those looking for a fundamental explanation are missing a significant structural change: The majority of stock trades now originate with so-called “high frequency” funds, which use computers programmed with obscure mathematical correlations to execute trades. The computers trade in and out of stocks at light speed, sans human intervention -- no trader, no economist, no chart tracker. These funds argue that computers aren’t swayed by emotion, and naturally move much faster than a person ever could.
Ushered out is the model of fundamental investing that lasted a century. Still, humans must program the computers, and they’re not infallible (see the 1998 collapse of Long Term Capital Management).
These funds are generating almost three-quarters of all US equities trading volume, the Tabb Group, a consultancy, recently estimated. Five years ago, the fraction of total trades carried out in this way amount was estimated as less than one-quarter. Some of the funds are household names -- Renaissance Technologies and Goldman Sachs (GS) are 2 of the biggest players -- but others, like GETCO, Peak6, RGM Advisers, and Hudson Bay, aren't. Many are based in Chicago, and emerged from the city’s options trading pits. Other hedge funds run by the likes of Bank of America (BAC), Morgan Stanley (MS), Citigroup (C), and
UBS (UBS) also have used the strategy.
Their presence has expanded quickly following the start of the bear market: Hedge funds and money managers lost money and dropped out in droves. They use trading strategies that arbitrage minute differences in share prices and trading speed -- known as latency -- between exchanges and other trading venues.
No positions in stocks mentioned.
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2009-07-14 10:10:24
A stock market?
No not a stock market any more, just a casino that is played using shares instead of the usual cards or chips.
If fundamentals and economics, yields, p/e no longer matter, only mere fractions of a second are important, then this is no longer a stock market.
Governments should bring in a tax on high frequency trading!
If fundamentals and economics, yields, p/e no longer matter, only mere fractions of a second are important, then this is no longer a stock market.
Governments should bring in a tax on high frequency trading!
2009-07-14 14:46:12
Old news
I complained that the bots were taking over YEARS ago.
Any daytrader/scalper knows this.
The should be banned.
Co located servers, banned. It legalized frontrunning. Get rid of it.
Any daytrader/scalper knows this.
The should be banned.
Co located servers, banned. It legalized frontrunning. Get rid of it.
2009-07-14 14:55:37
No Economic Value
Ryan,
Thanks for this update.
As I mentioned with John Mauldins' article, this type of activity produces no value or economic activity. It just rewards clever algorithm design, and massive capital investment in computers. We are being nickel and dimed, to pay for a few beach houses in the Hamptons.
As the prosecutor said, "with this code someone could manipulate the market". So everyone jumped on GS, and said they couldn't be trusted.
What about cyber crime, and the recent wave of attacks? If the markets could be manipulated, then outsiders could also do this.
Once again a few select insiders having access, and the ability to profit.
"The little guy" needs to pay for it.
I wish some of these funds could figure out ways to use their money to create value in this country. Of course the ROI might not be as great as with a government deal, but one wouldn't have to worry about a sudden rule changes.
How about using inside government influence to get a few nuclear plants built? Some transmission lines?
I guess the ROI must be too low.
Thanks for this update.
As I mentioned with John Mauldins' article, this type of activity produces no value or economic activity. It just rewards clever algorithm design, and massive capital investment in computers. We are being nickel and dimed, to pay for a few beach houses in the Hamptons.
As the prosecutor said, "with this code someone could manipulate the market". So everyone jumped on GS, and said they couldn't be trusted.
What about cyber crime, and the recent wave of attacks? If the markets could be manipulated, then outsiders could also do this.
Once again a few select insiders having access, and the ability to profit.
"The little guy" needs to pay for it.
I wish some of these funds could figure out ways to use their money to create value in this country. Of course the ROI might not be as great as with a government deal, but one wouldn't have to worry about a sudden rule changes.
How about using inside government influence to get a few nuclear plants built? Some transmission lines?
I guess the ROI must be too low.
2009-07-14 15:24:04
HFT
High Frequency Trading should be banned, or at least heavily taxed, they are making money from someone and that someone is not GS.... it is the small trader without access to superfast computers and high speed connection, taxpayer and their pension funds yet again.....
it is obscene that this should be allowed. Again, one rule for the big players and one for the rest... till it all blows up and guess who will be baling them out and minimising their losses.
This is the worst of all worlds developing, but the governments are puppets on strings
it is obscene that this should be allowed. Again, one rule for the big players and one for the rest... till it all blows up and guess who will be baling them out and minimising their losses.
This is the worst of all worlds developing, but the governments are puppets on strings
2009-07-15 01:23:24
While all the bitching about high-frequency algorithmic traders by people who appear to know next to nothing about it?
The algo traders I know are market-makers; they ADD to the market's liquidity.
In exchange for being a market "maker" (and not a market "taker") these programmers receive a small "rebate" from the exchanges at which they post their bids & offers.
The high-frequency stock traders I know profit only from the rebates they collect from the exchange, not from their ability to predict the next tick in a stock's price.
Additional market-makers are welcomed because they increase liquidity; they tighten & deepen the bid/offer spreads.
How is any of this "bad" for the retail or institutional stock trader?
Of course algo traders try to detect future price movements based upon their order flow (in electronic time, not by "reading" a ticker tape). But why begrudge them for that?
If you spent several million dollars on the technology & personnel to build such an operation why would you leave such data unanalyzed?
If you want to "hurt" a high-frequency market-maker just hit (or lift) their quantity on large size. That always stings.
But don't complain about algo traders when you enjoy a one- or two-penny-wide bid-offer spread in your favorite stock.
We should all hope that more markets -- like CDS & MBS -- go electronic. Then there would be more transparency and less debate about asset prices.
Opponents of high-frequency trading need to make a clearer case on behalf of their cause.
The algo traders I know are market-makers; they ADD to the market's liquidity.
In exchange for being a market "maker" (and not a market "taker") these programmers receive a small "rebate" from the exchanges at which they post their bids & offers.
The high-frequency stock traders I know profit only from the rebates they collect from the exchange, not from their ability to predict the next tick in a stock's price.
Additional market-makers are welcomed because they increase liquidity; they tighten & deepen the bid/offer spreads.
How is any of this "bad" for the retail or institutional stock trader?
Of course algo traders try to detect future price movements based upon their order flow (in electronic time, not by "reading" a ticker tape). But why begrudge them for that?
If you spent several million dollars on the technology & personnel to build such an operation why would you leave such data unanalyzed?
If you want to "hurt" a high-frequency market-maker just hit (or lift) their quantity on large size. That always stings.
But don't complain about algo traders when you enjoy a one- or two-penny-wide bid-offer spread in your favorite stock.
We should all hope that more markets -- like CDS & MBS -- go electronic. Then there would be more transparency and less debate about asset prices.
Opponents of high-frequency trading need to make a clearer case on behalf of their cause.
2009-08-06 19:15:23
HFT
bro read zerohedge.com . you will find plenty of info on why its a scam. market makers???...Please
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