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The Almighty Buck Robotics United States News Technology

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

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 @07:00PM (#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?


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

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

        Which in the end leads to complete destruction.

        What has happened is that there is a subset of people who are so consumed by their lust for money. Well this is inevetible of course, and is in large part a driver of the economy. A good thing when managed well.

        But what has happened is that we have become unbalanced. In order to have a healthy economy, all sectors need to have their interests included. If we stray too far in one direction or the other, the results aren't pretty.

        If for example, we head t

    • by Hatta ( 162192 )

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

      The rich and powerful don't get richer and more powerful as quickly if you could only issue one trade per second. So HFT makes the world a better place, if you're rich and powerful, who are the people making the rules anyway.

    • Re: (Score:2, Insightful)

      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 liquidit

      • by Hatta ( 162192 )

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

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

      • A high trading volume facilitates this.

        HFTs don't trade in low volume market anyways, so the liquidity argument is bogus. On the other hand they add systemic volatility (see the Flash Crash).

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

      • 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.

        It's obvious that this is extremely important... if your business model is based on many fast sales at low fees. But it's hard to see how millisecond transactions provide any benefit to the kind of shareholder that actually invests in businesses and expects to still be holding their shares weeks, months, or even years after having bought them. It's also hard to see what benefit the companies in question gain form having their share price bounce around by the millisecond instead of by the second or even the

    • It would just take longer for markets to equlibrate. Less volume, more volatility. Higher transactions costs. I think of HFT as just how markets work. It should be less and less profitable as we move forward and algorithms and cpu cost goes down. Market makers giving certain companies HFT advantages to make massive profits and charge the buyer a higher price, are clearly monopolistic practices that go against everything HFT is designed to do.
  • No where does the author define the units at play, EXPLICITLY.

    So, I'm guessing that it's the volume (number of) shares traded on a specific day, on a minute basis throughout the entire business day. Multiple data are included, representing the various trading markets in the US.

    That makes:
    x: time (from 8 am to 4 pm, eastern time)
    y: shares traded at time x (multiplier? could be x10^1, x10^7, or who knows)
    chart title: the specific day depicted

    • 'minute basis' is the wrong metaphor. microseconds are the current unit of measure.

    • I think the whole notion is a diversion.

      The market collapsed because of massive fraud, especially in the home mortgage finance business. The criminals who stole our wealth would love to blame it all on computers, high frequency trading, Europe, oil, God, or whatever. Anything but them.

      Guess computers are the whipping boys for the moment. There may be inherent problems with high frequency trading, but no one is sure. What we can be sure of is that fraud, insider trading, and excessive executive compe

  • by GeneralTurgidson ( 2464452 ) on Tuesday August 07, 2012 @07:07PM (#40911261)
    Wall Street is really pushing the envelope on high performance computing and programming. It's hard to not be impressed by the hardware and performance.
    • Re: (Score:2, Funny)

      by Anonymous Coward

      Yes, they are working on the next gen, its something called Skynet. I hear that will really blow you away!

  • Owning stock in a company actually mean owning as share in the Goods the company was going to sell?

    Seems almost alien in today's world of baffling bulls**t which is what we get out of Wall Street. Makes Calculus look like finger painting.

  • by Max Threshold ( 540114 ) on Tuesday August 07, 2012 @07:29PM (#40911477)
    There's an interesting parallel between the bots and scripts people use to play TradeWars 2002 and the bots and scripts people use to trade on the stock market. It seems to me that the TW2002 arms race may serve as a model for understanding the fundamental problem and what Wall Street or government regulators might be able to do about it.
  • by tolkienfan ( 892463 ) on Tuesday August 07, 2012 @07:38PM (#40911577) Journal

    This is what you get when the uninformed do journalism.
    This article has only HFT volumes to go by, and yet draws some dark conclusions about the future.
    It's all nonsense. I've been in HFT since before the beginning of the animation. I can say that the trades are mostly very simple. They are written with great care and attention to risk. HFT shops have no unfair advantage - like any trading company they put up risk and capital in order to attempt to make a profit. And when things go wrong they can lose bug and fast. The reason for growth in HFT is partly due to how easy it really is.
    More and more trading companies are trying to enter the game.
    HFT is like Target. They cut margins to next to nothing and make it up with volume.
    Knight is really a good example. They had the worst case scenario: heir robots were buying and selling on bad information and their risk systems didn't detect it. Bad for Knight. But did it crash the whole market? Did it have the same effect as the mortgage CDO fiasco? Not at all. HFT shops aren't leveraged. If they put up $1 they could lose $1. And often they do.

  • Asimov's vision of the world economy being controlled by machines has become reality.

    Unfortunately for us, the machines we actually put in place bear little resemblance to those he described. Instead of being programmed with the 3 laws, and therefore a help to mankind by eliminating poverty and famine, we have programmed them to enrich the few at the expense of the many.

    Such a system can not, and will not, be sustainable - as History so abundantly proves.

  • by jgotts ( 2785 ) <> on Tuesday August 07, 2012 @07:49PM (#40911711)

    For around seven years I programmed a derivative trading system. Unfortunately our company went out of business due to lack of capital and possibly because our large competitors were cheating (not obeying firewalls between trading for customers and trading for themselves).

    I view high-frequency trading (HFT) as great for society. Here is why: What HFT gives you is the fairest and most accurate (best) price for something. When there are many, many trades, the price gap between the individual trades becomes so low that there is no chance that you'll pay too little or too much for something or that you'll wait too long for your trade to happen. I'm talking about people who just want to buy something, not HFT traders.

    You're hungry and you want to cook yourself dinner. Your dinner is made up of commodities that are traded, except perhaps for the parts that you bought at the local farmers market. But you and the farmer used gas and a vehicle of some sort to make the transaction. If you rode your bike, your bike is lubed with oil and made of steel, etc. With HFT in play, everything that went into the transaction was bought and sold at the fairest price possible. Nobody got gyped because of low market volumes that day, and nobody had to pay a gigantic fee to a broker because the cost per transaction is now tiny.

    Of course you have issues like the flash crash. The best way to look at the flash crash is like this. Shares of John Gotts (JG) are worth $40, based upon fundamentals (intrinsic worth) and an idea about the future. Somebody sold a gigantic number of shares of JG for $20. Excellent computer algorithms put in buy orders for JG at $15 and possibly foolish computer algorithms found a way to sell shares of JG at that price, foolish if they bought the shares for more than $15 or smart if they bought the shares for less. The spiral kept going downwards due to both foolishness and intelligence. You can see that there were many, many winners. Every algorithm that bought shares for JG at less than $40 had the potential for a huge windfall. There are no rules against creating an intelligent HFT to look for mini-flash crashes and make a killing as a result. Fortunately or unfortunately, many of the trades that did happen were unwound by the exchange.

    Finally, what I need to stress here is that computers aren't trading with other computers. Teams of programmers working with traders are writing code that does their bidding. The computer is the trader's tool, not the trader itself.

  • by 200_success ( 623160 ) on Tuesday August 07, 2012 @07:51PM (#40911725)

    From this, I would draw the opposite conclusion: we should oppose proposals for a financial transaction tax at all costs! If high-frequency trading is the disease, then a tax on transactions is not the cure. It would make government addicted to the new revenue and therefore dependent on the high-frequency traders, thus ensuring that those leaches will never go away.

    A better solution, I think, would be to require stock exchanges to operate on a once-per-second clock. Any trade orders that arrive within each timeslice would be executed in a random order, so as to defeat any advantage the high-frequency traders would get by being fast.

  • by cpm99352 ( 939350 ) on Tuesday August 07, 2012 @07:51PM (#40911727)
    To repeat my comments from just a few days ago [] , the fine article [] states on page 4:

    Many HFTs will make near-simultaneous trades on different exchanges and profit because of the delay in one of the exchanges. An example will help me explain: let’s use the NASDAQ and EDGE exchanges, and say that ABC stock is trading at $1.00. The HFT will send a bunch of quotes (offers) to NASDAQ and EDGE, trying to sell ABC stock at $1.01. Once the NASDAQ order is accepted, the HFT can simultaneously cancel the $1.01 sell order on the EDGE exchange and replace it with a buy order at the original price of $1.00. EDGE immediately accepts that $1.00 order, because its system has not caught up to the new price of $1.01, and the HFT’s net position becomes zero. This is possible because of latency, which is jargon for delay in the system. The net result is, the HFT captures a $0.01 arbitrage. By scalping this tiny amount from many trades, the profits add up quickly

    Let's repeat: the HFTs are putting orders on the system for which they have no intention of fulfilling. This is a violation of SEC rules, yet the SEC does nothing. There was an AC responder to my post who made a blanket denial cancellations were happening. Care to respond?
    • Re: (Score:3, Insightful)

      by Anonymous Coward

      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 lim

  • execute trades? (Score:4, Interesting)

    by Lehk228 ( 705449 ) on Tuesday August 07, 2012 @09:08PM (#40912795) Journal
    Rather than executing trades at a million per second it would be better to execute bankers at a few dozen per day.

    similar to the french revolution

    after a year or two of that, re open the markets with manual trades only, pen and paper and voice communication, no automated signalling or actions of any kind
  • by Trogre ( 513942 ) on Tuesday August 07, 2012 @10:02PM (#40913399) Homepage

    To quote Dave Barry, on the Great Depression as seen from the 1980s:

    The stock market of the 1920s was very different from the stock market of today. back then, the market was infested by greed-crazed slimeballs, get-rich-quick speculators with the ethical standards of tapeworms, who shrieked "buy" and "sell" orders into the telephone with no concern whatsoever for the nation's long-term financial well-being. whereas today they use computers.

  • by capsfan100 ( 2703401 ) on Wednesday August 08, 2012 @04:58AM (#40915911)
    I'm an Investment Adviser Representative, so I work in the industry, a mere pawn 2000 miles from Wall St. HFT hits home for me, as it costs my clients money. There's a legal foothold here to ban this activity, called Front-Running. If I hear a co-worker say "I'll place that buy order for 1000 shares of Google as soon as we hang up" and I then race over to my computer to place my own Google buy order first I can be prosecuted. It's called Front-Running because I'm racing my order in in-front of a trade I know is coming. (My new holding should bump up a tick when their order comes in next driving up the market price. It works more reliably with thinly traded stocks. And did I mention it's illegal?) And yet the exchanges, for payment, allow the high-frequency traders to see incoming trades. It's illegal, plain and simple. The question is why no one has stopped it yet. The CFTC has done some good investigations, I hear. I can't give investment advice as every person's situation is unique. But do you think more or fewer potential investors will want to get in the market once this criminal activity is stopped?

"To take a significant step forward, you must make a series of finite improvements." -- Donald J. Atwood, General Motors