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The Almighty Buck Robotics United States News Technology

This Is What Wall Street's Terrifying Robot Invasion Looks Like 443

Posted by Soulskill
from the skynet-begins-in-our-stock-markets dept.
pigrabbitbear writes "Given the the endless mind-whirling acronyms, derivatives and structures of the financial markets, we're rarely served with a visualization that so elegantly illustrates the arrival of Wall Street's latest innovation. This is what High Frequency Trading — the official monicker of Wall Street's robot army — looks like, when specially programmed computers make massive bets at lightning speed. Created by Nanex, the GIF charts the rise of HFT trading volumes across all U.S. stock exchanges between 2007 and 2012. The initial murmur, the brewing storm, the final detonation: Not just unsettling, it's terrifying."
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This Is What Wall Street's Terrifying Robot Invasion Looks Like

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  • by Gavin Scott (15916) on Tuesday August 07, 2012 @06:00PM (#40911179)

    ...why high speed trading is a good idea for anyone? It seems like the equivalent of slash-and-burn agriculture where you're destroying a resource (in this case basically sanity) in exchange for a one-time benefit of briefly being faster than your competitors.

    So can someone explain how the world is a better place than if, say, you could only issue one trade per second?

    G.

  • As one of the articles explains, HFT algorithms trade almost exclusively based on other trades. Guess what behavior is almost guaranteed to cause a bubble?

  • by Adult film producer (866485) <van@i2pmail.org> on Tuesday August 07, 2012 @06:02PM (#40911195)
    Human behavior.
  • by hamster_nz (656572) on Tuesday August 07, 2012 @06:04PM (#40911225)

    Bubbles exist when the market becomes disconnected from the true value (if there is such a thing!) of the asset...

    I don't know much about HFT, but I am pretty sure that the HFT algos no nothing about the true value of the asset, and they are just gaming the markets.

    When most of the trades in the market are traders trying to out-gaming each other, that can't be healthy.

  • Bad (Score:5, Insightful)

    by sycodon (149926) on Tuesday August 07, 2012 @06:04PM (#40911227)

    Automated trading is a Bad Thing.

    It is a joke to call it Market. It's no more than a Vegas Slot machine.

  • by LordLucless (582312) on Tuesday August 07, 2012 @06:05PM (#40911241)

    where you're destroying a resource

    ...which isn't yours, and you have no long term interest in

    in exchange for a one-time benefit of briefly being faster than your competitors.

    ...during which period you made several hundred million dollars.

    Tragedy of the commons

  • by the eric conspiracy (20178) on Tuesday August 07, 2012 @06:16PM (#40911355)

    Market liquidity is extremely important. If you decide you want to trade your shares you want to be able to do so quickly and with a low trading fee. And you want to be able to get the same price no matter where you sell them, London, New York, Hong Kong.

    A high trading volume facilitates this. A limit on how fast a broker can trade could cause people to be unable to sell their stocks if they want/need to.

    Many experienced investors believe that the three most important things about an investment are liquidity, safety of principal and yield. In that order.

    I remember when my father was investing in the stock market - an order to his broker would cost $150 to execute and take hours to process. And the price was fairly unpredictable. Now you can do an order at 1/20th the price, be pretty sure of what the execution will be because of the ability to place limit orders and get confirmation nearly instantly.

    What we have now is much better than the olden days. Of course there are downsides but I think if you are aware of them you can avoid them.

  • Re:Luddite (Score:4, Insightful)

    by Anonymous Coward on Tuesday August 07, 2012 @06:20PM (#40911403)

    Except the costs have gone up. Dramatically.

    Remember that bull market back in 1999? NYSE upgraded their networks in the 3rd quarter of that year to handle a whopping 1,000 quotes/sec.

    Today, you need to process 1.5 million quotes a second. Apples to apples. Well, except for the trading part, there, it's apples to rotten tomatoes

    Here's a graph comparing growth in quotes and trading. http://www.nanex.net/aqck/2817.HTML

    I'm all for more faster trading. But that demands increased transparency. I should know more about where my $20,000 trade executed and the route my order took than my $20 order from Amazon.

    The real Luddites are those who like obscurity. Because if the markets were as transparent as they should be "with a greater degree of computer involvement", then the game wouldn't work.

  • by TooMuchToDo (882796) on Tuesday August 07, 2012 @06:27PM (#40911475)

    Knight Capital, a conservative market-maker, is going bankrupt because it's automated trading algorithms ran for 30 minutes in a poor configuration (losing money on each trade). How much did they lose? About $440 million dollars. In 30 minutes. Because someone didn't make it to the STOP command in time.

    Not a bubble, just a way to destroy an organization in an automated fashion very quickly.

  • by bertok (226922) on Tuesday August 07, 2012 @06:34PM (#40911527)

    Market liquidity is extremely important.

    Lets assume for a second that it is important to be able to trade a hundred times a second, which isn't even an exaggeration of what's already happening.

    Then, logically, one would expect the entire financial world collapse every night when the markets close for hours.

    Oh wait, nothing happens, and everything continues like normal the next morning!

    Hence, the assumption that high-speed trading is vital is clearly false.

    It's one thing to have a high volume of real trades, but it's entirely another thing to have a ludicrous volume of very small meaningless trades by third-parties that neither want to buy nor sell, but just want to "play the game" and skim off the top.

  • Re:Luddite (Score:5, Insightful)

    by SuperKendall (25149) on Tuesday August 07, 2012 @06:36PM (#40911551)

    You have an unusual viewpoint if you consider HFT to be progress.

    I consider it to be inevitable. Given that, you must learn to deal with it in whatever way suits you best.

    I am all about reality, not hiding my head in the sand or spending my life trying to stuff worms back in a can.

  • Re:Luddite (Score:3, Insightful)

    by c0lo (1497653) on Tuesday August 07, 2012 @06:44PM (#40911643)

    It's only terrifying if you are some kind of luddite.

    Everything is getting faster, with greater degree of computer involvement.

    HFT is not wrong because it uses computers, HTC is wrong because the algos react only to change in prices and have no input whatsoever on the actual value of the enterprise behind the stocks. That is: the HTC reaction is based on the ones perception on the perception of the others - it is tolerable for low levels of "second hand perceptors" but... when the level of them is high, the risk of "computerized market panic" increases dramatically.

    “To err is human, but to really foul things up you need a computer.”
    (Paul Ehrlich)

    “A computer lets you make more mistakes faster than any invention in human history–with the possible exceptions of handguns and tequila.”
    (Mitch Radcliffe)

    In other words: in HFT, the wrong is not the use of computers, but how you use them.

  • by jpapon (1877296) on Tuesday August 07, 2012 @06:44PM (#40911647) Journal
    Because it should be fraud to make a bunch of bad loans, package them together, give them a high rating, and then sell them to the government (or anybody).

    If I take droppings from a bunch of individual chickens, put them together, cook them a little, and then sell them as "Chicken derived high-fiber compound", I can't very well lie to you and tell you that I'm not selling you shit.

  • by trout007 (975317) on Tuesday August 07, 2012 @06:46PM (#40911669)

    You are missing a vital piece of information. You explain what a bubble is but not why it forms. The reason for most large bubbles is when currency is inflated and rates are set below a market rate by a central bank. This new money has to go somewhere and wherever it goes it causes a misallocation of resources. This can happen without a central bank but without an endless source of new money those bubbles tend to be small and burst quickly.

    Also there is no such thing as the true value of anything. Value is completely subjective. Everyone values things differently. In fact that is the only reason anyone trades. I value the gallon of milk more than the price while the store values the money more than the milk. Nobody goes around trading things of equal value.

  • by CrimsonAvenger (580665) on Tuesday August 07, 2012 @06:46PM (#40911673)

    That's an interesting point, because the socialistic societies of the indigenous is what allowed the bison to flourish.

    Note that there is some evidence that the Amerinds were well on the way to exterminating the bison after the Amerinds acquired horses.

    It should also be noted that the reason they didn't exterminate the bison earlier wasn't their "socialistic society" but the fact that they were technologically limited to the point that it was impossible.

    Note also that there is evidence that the bison population of the early 19th century, which is assumed to be "natural" was, at least partly, a result of the plagues brought from Europe wiping out the Amerinds who had previously limited bison numbers...

    And note, by the by, that these same peoples seem to have managed to exterminate the megafauna in America in prehistoric times just fine.

  • by pla (258480) on Tuesday August 07, 2012 @06:52PM (#40911745) Journal
    And that is why the use of computers is better, because it enables the transparency you crave.

    Could you define "transparency" for us? Because you don't seem to mean it the same way as the rest of the world.

    HFT may indeed have created something resembling "transparency", but only insofar as it has made the entire market no more meaningful than a biased random number generator. What does it mean to conservatively invest in a company with strong financials and good growth potential, when entire sectors rise and fall with near-perfect correlation? Or more to the point, why do we even have a stock market?

    If it makes me a Luddite that I believe "investing" should have at least something to do with lending someone with an idea money in exchange for a cut of the profits, then I'll accept that crown proudly. When "investing" means trying to game the underlying system, do we really wonder why the economy sucks?


    We desperately need to implement at least one one of two really, really simple solutions - A transaction tax, and an end to intraday trading. Either of these would kill HFT overnight, and good riddance!
  • Re:Luddite (Score:4, Insightful)

    by DM9290 (797337) on Tuesday August 07, 2012 @06:54PM (#40911767) Journal

    It's only terrifying if you are some kind of luddite.

    Everything is getting faster, with greater degree of computer involvement. Deal with it mentally or sell everything you own and go live in a cabin in the woods somewhere.

    if only the woods could actually support 7 billion human beings, we could all go live there. But since they can't, we'll need to figure out a way to be more productive than machines which are increasingly capable of performing more and more work that only a few years ago required a human being to do.

    Just how many new occupations has the economy created in the past 20 years? How many occupations have been automated and rendered obsolete?

    Unless we start paying people to have fun, enjoy themselves and frolick in the park there is not going to be much work left for anyone to do.

  • by Cryacin (657549) on Tuesday August 07, 2012 @06:56PM (#40911791)

    Liquidity is good, but nobody needs their cash in microseconds.

    Heh heh, I read that as Liquidity is good, but nobody needs their crash in microseconds.

  • by Hentes (2461350) on Tuesday August 07, 2012 @06:58PM (#40911805)

    Liquidity is only important for the gamblers. Real investors who plan to put their money into a share for years can afford to wait a few days for a good offer.

  • by EdIII (1114411) on Tuesday August 07, 2012 @07:08PM (#40911937)

    Which President are you referring to? Disclaimer: I'm not taking any sides between Democrats and Republicans. They both screw us and give to their preferred 1%'s.

    All of the damage was set in motion long before our current President took office.

    What caused the housing bubble was no more than insatiable greed for ever growing profits from someplace.

    It was not enough that you could sell a mortgage to another company within a couple of weeks at most with some properly filed paper work. We needed it faster.

    It was too hard to go to court and actually fight with home owners when disputes arose over mortgages. No. No. No. We needed deeds of trust and laws to bypass due process and just kick people out of their homes without any way to defend themselves.

    It was not enough to make origination fees off normal home buyers and package up their loans in huge instruments and sell them. We needed new loans that made speculative investors take interest and start buying more houses than ever before.

    If was not enough to make huge amounts of money off the speculative investors. We needed to fuel the ever growing beast as fast as fucking possible for as long as fucking possible .

    What did we get? Poor unsophisticated people with bad credit, low income, and no chance in hell of paying off a mortgage that was going to have monthly payments increase 50%-100% within 24-36 months.

    All of those speculative investors that had short term goals for properties within the next 3-5 years? They're screwed proper.

    All of those average home owners who were lured in by cheap home equity loans with people whispering in their ears that there was no bubble? Totally fucked.

    Guess what?

    YOU CAN'T BLAME THIS ON JUST *ONE* PRESIDENT.

    Nice try though.

  • by pla (258480) on Tuesday August 07, 2012 @07:13PM (#40912027) Journal
    Bubbles take years to develop, no microseconds.

    Not anymore. Thanks to the magic of computers, self-reinforcing feedback between a sufficiently large number of "traders" means the price can skyrocket or crash in a matter of minutes.
  • by cpm99352 (939350) on Tuesday August 07, 2012 @07:28PM (#40912255)
    Lots of replies to your post! The bank collapse could have been contained had government enforced existing laws. There is/was a massive amount of fraud in the bubble, which the FBI was aware of at the time, as well as others who paid attention.. At the least, fraudulent loan applications could have been pursued. At a better level, bank/finance firms clearly misrepresented to investors about the underwriting standards when they sold the bundled products. We also have fraudulently signed and notarized documents on titles. So, lots of low hanging fruit in the real estate bubble.

    The Federal Reserve has injected massive amounts of money into the system to try to contain the crash, and bubbles still persist. In the stock market, only chumps are getting prosecuted. The major players (Goldman Sachs and other HFT firms) are untouched.

    The fine article [caseyresearch.com] states (on page 7): "The thing is, the SEC already has rules against placing orders not intended to be filled. Obviously, it doesn’t enforce them very well."

    http://www.hsdl.org/?view&did=456724 [hsdl.org] is a nice PDF from where on page 126 we read:

    "The FBI significantly reduced its investigative efforts for fraudulent activity involving financial institutions (such as banks). Principally, the FBI scaled back its handling of lower dollar cases [SENSITIVE INFORMATION REDACTED]. We agree that the FBI must prioritize its investigations and first address the most egregious criminal activities. However, discussions with USAOs and analysis of USAO data revealed that no other federal agency has replaced the reduced FBI effort in this crime area. Therefore, an investigative gap exists for financial institution fraud (FIF), [SENSITIVE INFORMATION REDACTED]."

    This is also found at http://www.justice.gov/oig/reports/FBI/a0537/chapter13.htm [justice.gov]

    Michael Burry made billions (with a b) betting on the downfall of the CDO's. After writing an op-ed [nytimes.com] in the New York Times asking why the government (including the Federal Reserve) didn't see the same things he did, he was audited by the IRS. So, again we're looking at a massive financial system where the rules are not being enforced.
  • Re:Luddite (Score:4, Insightful)

    by lgw (121541) on Tuesday August 07, 2012 @07:31PM (#40912295) Journal

    Stock shares are fungible. If I have 10000 shares of XYZ at the beginning and end of the day, and alternately buy and sell 100 shares every few seconds, how long have I held those shares? Add some 0s and tha's what pur human traders working for market makers have done for centuries.

    HFT just automates what those humans did,and it's great if you have to trade some thinly-traded security for which there didn't use to be any market makers (because it wasn't worht a human's time to do the math when so few shares traded). It really sucks when the best bid/ask out there allows you to buy for $3 or sell for $1 - I'm happy enough to see this move to $1.60 and $1.50, and don't care at all that a different broker is making money as a result.

  • Re:Luddite (Score:4, Insightful)

    by Pf0tzenpfritz (1402005) on Tuesday August 07, 2012 @08:07PM (#40912785) Journal

    I consider it to be inevitable. Given that, you must learn to deal with it in whatever way suits you best.

    Right. Because stock prices are nature's law - in the same way, economists are scientists.

  • Re:Luddite (Score:4, Insightful)

    by Shavano (2541114) on Tuesday August 07, 2012 @08:40PM (#40913137)
    If the government decides it's not in the public interest they can stop it. At least they should tax it so as to extract the maximum revenue. E.g. 0.1% on every transaction, waived if you hold the instrument more than 10 minutes.
  • Re:Bad (Score:4, Insightful)

    by tmosley (996283) on Tuesday August 07, 2012 @09:07PM (#40913457)
    So do corporations in a fascist society. You know, privatize the gains, socialize the losses, pretend like the trades that cause flash crashes didn't happen. Honor some of those trades, but not others, etc, etc.

    The SEC is CRIMINALLY NEGLIGENT in their refusal to so much as INVESTIGATE the links between certain HFTs (especially those run by the likes of JPM) and the exchanges they "provide liquidity" for. Pure fascism.
  • Re:Chain reaction (Score:2, Insightful)

    by tmosley (996283) on Tuesday August 07, 2012 @09:15PM (#40913539)
    You do realize that owning stocks without stop losses is like sleeping in a room with 1000 rabid apes in it, right? You won't just get your face ripped off, they won't so much as find a splinter of bone when they are done with you.
  • Re:Luddite (Score:2, Insightful)

    by peragrin (659227) on Tuesday August 07, 2012 @09:33PM (#40913695)

    it is never your property.

    in order to become property you have to own it for more than a few microseconds. HFT is nothing but a roulette wheel spinning. you get to choose between red or black, and that's it.

    HFT has no real world value except to make the overall stock market bounce around like a drug addict going through withdrawal. Trading is supposed to represent an investor looking to support a company in exchange for profit. HFT means you think the company itself is worthless but you want to gamble anyways. if the stock market is to represent investing then you should be required to hold on to your investment for a minimum amount of time. I like a day but even an hour or two would basically cut 90% of the daily volatility out of the market.

    Look at it like this Company A's goes up and down every second the actual price isn't changing company profits aren't changing The overall value of the company isn't changing but it's stock worth is bouncing around for no good reason. Some companies are massively overvalued. others are so massively undervalued it is funny. Stocks are supposed to represent long term interests however the stock market itself is forcing companies to look only until next quarter any further out and they are punished massively.

  • by joocemann (1273720) on Tuesday August 07, 2012 @11:18PM (#40914511)

    Get this through your obviously misguided head:

    -wall street does *not* exist for the purposes of making money for those who play there

    -wall street exists for people to take ownership of businesses they have confidence in and feel will grow as a good investment.

    -making money is supposed to be a consequence of the business' positivity in the real world and how the investment played a role in that business.

    The markets, despite your confusion, or the claims made by the new wave of exploitative greedy shitbags, are to facilitate publicly available ownership of businesses that have real presence, employees, products, and consequences.

    Just because shitbags have turned the markets into exploits and dragged our leadership through bed with them, doesn't make their claims about what the market is for 'correct'. It just means that the oligarchy has persitent rhetoric and have established law to uphold it.

  • by Anonymous Coward on Tuesday August 07, 2012 @11:53PM (#40914747)

    If you're saying that arbitrage should be illegal, you have no idea what you're saying.

    Order cancellations happen all the time, and there's nothing wrong with that. In your example, the HFT has EVERY intention to fulfill their order at $1.01. They just got a better offer elsewhere first. Now that they have a short position at $1.01, of course they are free to see it at $1.

    Do you even know how trading works? When for example you sell something on ebay, and the price doesn't hit your buy it now price(sell limit order), do you feel obliged to sell it? Or do you cancel the listing once someone else offers to buy it for that price? Make no mistake. If the order is filled on both sides simultaneously, they WILL be obliged to hold two short positions.

      Even before HFTs came about, arbitrage was done all the time. It just wasn't done as efficiently. As a result, the spread was bigger back then, since it's a function of liquidity. Only people who never trade bitch about low spreads being harmful to the average investor. Yes, I said investor. Even if you were intending to hold onto your stock for 15 years, it's still in your interest to keep spreads low, and that's what HFT does.

  • by Anonymous Coward on Wednesday August 08, 2012 @03:34AM (#40915803)

    1. It doesn't matter who is doing the whining, is there complaint true? You don't dispute it is true.
    2. I can recognize that HFT is a parasitic trading that takes money away from investors and the companies they invest in.
    3. I am not a former stock broker, hence you claim doesn't apply to me.

    It's a parasitic trade, it's no different from any other scalping in it's nature, however it's grown to such an extent that it's threatening the underlying investor market and thus needs to be stopped.

    "If you think HFT is bad, then you must think $0.99 individual tracks"
    False equivalence, if iTunes was HFT scalped, you'd be paying $99 for the track you really want and unable to buy any other tracks. Meanwhile the artist would be getting only $0.26, and the middle men HFT traders $98.01.

    A rip off market rigged for insiders is good for no one and (to use your argument) only HFT rip off insiders defend it.

  • Re:Luddite (Score:5, Insightful)

    by SerpentMage (13390) <ChristianHGross@ ... o.ca minus punct> on Wednesday August 08, 2012 @06:09AM (#40916409)

    As somebody who actually deals in the market and writes algos, I have to add you have no idea what you are talking about.

    HFT by itself does not push the price around. What HFT does is be the catalyst to any slight news. Think of it as follows. Put a fire in a forest and it burns, but it burns with some control. Put a fire in a forest that 100% oxygen and you don't have a chance in hell. This is HFT in a nutshell.

    What happens when there is any slight movement whatsoever the HFT will overdo the moves. This then leads to the problem of psychology where traders will ask, "maybe there is something wrong with this company and they begin to sell off even more." The 100% pure oxygen HFT will then begin wild fire that nobody can control.

    HFT is a problem and it needs solving. Case in point, America uses much more HFT due to the lower market costs. Europe is not better, it is that in Europe costs of doing business are much higher hence not as attractive for HFT. Where have all of the screw ups been? Oh yeah America...

  • by necro81 (917438) on Wednesday August 08, 2012 @07:47AM (#40916923) Journal

    As one of the articles explains, HFT algorithms trade almost exclusively based on other trades. Guess what behavior is almost guaranteed to cause a bubble?

    Human behavior.

    Well, yes, that too. But positive feedback loops are a real bitch. In a real, physical system, positive feedback can be mitigated through damping, time delays, etc. In the worst case, you are still limited by the strength of your actuators - you'll saturate the system, or become slew-rate limited. Sticking a microphone next to a loudspeaker may make an unpleasantly loud sound, but it doesn't immediately become infinitely loud. HFT has the potential to blow up, almost without bound, almost immediately. Would the liquidity and purity of the market really suffer that much if the minimum hold time was, say, one second? At the very least, it would slow the ridiculous arms race of who can clear the most trades per second. I'd be pleased it we could free up the brainpower of some of those very smart people to solve more important, though less immediately profitable, problems. When a billion-dollar investment to shave a millisecond off latency times becomes worthwhile, it is time to change the game to straighten out our priorities.

  • Re:Luddite (Score:4, Insightful)

    by PopeRatzo (965947) on Wednesday August 08, 2012 @02:39PM (#40921669) Homepage Journal

    What caused the economic collapse was the bubble in the housing market that caused people to take out unreasonably large mortgages they had no possibility of repaying.

    Not at all. Every subprime and underwater mortgage in the US could have been paid in full with significantly less than $500billion. Yet, just the first TARP bailout of the banks was what, $900billion? And subsequent banking bailouts come to another trillion, trillion and a half, not to mention "quantitative easing" which has cost us another half to one trillion.

    AIG did not collapse because of people not being able to pay their mortgages. Same with Merrill Lynch. They were taking those mortgages and leveraging them thirty to a hundredfold. And the thing with leverage, in money as in physics, is that a small bit of energy at one end of the lever makes a big movement at the other.

    And the problem gets worse to this day. Derivatives are inherently dangerous, but the risk is socialized so that the next time a big bank messes up, maybe from a little hiccup in their automated trading model, it's you and I that are going to be on the hook for the damages, just like last time.

    And still, there is extreme political opposition to tightening up the regulations on these guys. Any politician who makes any effort to clean up this dangerous mess is targeted for destruction (example: Elizabeth Warren).

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