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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 Anonymous Coward on Tuesday August 07, 2012 @07:19PM (#40911389)

    Back in the day - 1980s early 90s - when you wanted to buy a stock, you ballparked the transaction costs at a quarter one way. In other words, add $0.25 per share to the asked price if you were buying or subtract $0.25 from the bid price if you were selling. That's $25 for one hundred shares and most retail brokers charged more. I remember buying 50 shares of IBM and paying over $60 in dealer spreads, exxchange fees and broker commissions.

    Today, I can buy those sames shares with a transaction cost of $0.05 per share dealer spread plus $7.

    That reduction in dealer spread is because of HST. Now, that $20 or so is much better in MY pocket than in some overpaid salesman who just filled out a ticket back in the day. Yes, part of the lower cost has been changes in the law and because of the internet. But the DEALER SPREAD - thank HST.

    Volatility? Is up -BUT because of all those computers fighting, the NET volatility is less - if that makes anysense. Second by second, things are all over the place, but minute by minte - day by day, things are a bit more stable. I remember the days of a stock up a few bucks and then down a few bucks just because of news - and there wasn't a computer there to counter act that because its model said the price movement was bullshit.

    Although, when those computers flake out, the shit hits the fan but I don't give a shit. I'm a value Benjamin Graham type of investor.

    tl;dr - for value "hold'em for while" retail investors, things have gotten a bit cheaper for us.

  • Re:Smash those looms (Score:5, Informative)

    by PraiseBob ( 1923958 ) on Tuesday August 07, 2012 @07:36PM (#40911547)
    You don't see anything slightly unusual about basing the financial underpinnings of our economy on computer programs that interact with each other and dictate the value of companies not based on actual profits, revenues, results, business methodology, strategic planning, or company history, but rather base the primary value of the company solely on the current trend of their stock, driving company value up and down in an attempt to exploit nanosecond timing to skim fractions of pennies off actual sales & purchases?

    We've seen several examples of bugs in these programs that translate into financial ruin for not only the people running the bots, but random companies as well until the trades get reversed. How much faith do you have that out of hundreds of these bots, none have any bugs that pose a greater risk? (Knowing that all programs have bugs, and we've seen this exact kind of problem already happen due to bugs)

    I guess I'm a luddite for wanting a financial system that pretends to be based on reality.
  • 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.

  • Re:Luddite (Score:4, Informative)

    by Sir_Sri ( 199544 ) on Tuesday August 07, 2012 @07:42PM (#40911613)

    That algorithm can be executed with or without computers.

    Which is the problem in all of this. Any broad 'plan' can be executed just as well by hand as it can by HFT computers. People who are seriously concerned about shifting the entire value of a company or a market move billions of dollars in a single transaction and don't particularly care about nanosecond to nanosecond events.

    Everything else is being scraped together the same way traders did before, only faster. Which isn't really good or bad. Stupid people made stupid trades, stupid people design bad algorithms and made stupid trades, people make mistakes, people programming computers make mistakes.

  • 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.

  • Re:Luddite (Score:4, Informative)

    by cpm99352 ( 939350 ) on Tuesday August 07, 2012 @08:03PM (#40911873)
    I am a big fan of Interactive Brokers - while their desktop app is pretty cool, the API is what makes them truly outstanding: []
  • Re:Smash those looms (Score:2, Informative)

    by Algae_94 ( 2017070 ) on Tuesday August 07, 2012 @08:50PM (#40912563) Journal
    The stock market IS based on reality. You are buying and selling shares of a company. HFT might cause temporary swings in what those shares are trading for, but it does nothing, that's right, absolutely nothing, to the value of the underlying company.

    Let's look at it another way. Say we have a market that buys and sells a commodity like crude oil. You buy a few hundred barrels of oil and hold on to them. Then some HFT algorithms go to work in the oil markets. Now you are seeing much wider swings in the price of oil. Does this actually alter the value of a barrel of oil? Can you suddenly do less with a barrel or more if the price goes up or down? What you are buying has an inherent value.If trading algos cause the price to swing one way or another, you have just found opportunities to buy or sell something at a price that is much better for you.

    It's people that don't take the time to understand how financial markets work and blindly throw their money at something they assume will just go up and up that get superstitious about HFT.
  • by lgw ( 121541 ) on Tuesday August 07, 2012 @08:54PM (#40912617) Journal

    The only value of X is what you can sell X for. The price of most stocks is driven short term almost entirely by fashion. HFT simply capitalizes on the realization that the herd usually stampedes in the same direction. Long term it's irrelevent.

  • Re:Luddite (Score:2, Informative)

    by tolkienfan ( 892463 ) on Tuesday August 07, 2012 @11:11PM (#40914049) Journal

    You have no idea what you are talking about.
    HFT doesn't push the price around. Supply and demand, profit, news, similar company price changes - the unseen hand - push the price around.
    HFT just makes it quicker and more efficient.
    Even if the value of a company stays steady, the bids will be below the value and he asks will be above. The market maker makes 1c per pair of trades acrid he spread per share.
    When companies price fluctuates it's mostly due to fluctuations in other instruments. Commodities, futures, options, other stocks, bonds, currencies, etc...
    When the price of milk futures changes, it affects the price of Kraft Foods because their costs change, and therefore their profit.
    HFT does not change price discovery (very basic economics) it makes it happen quicker.
    HFT results directly from competition, and has made the markets much more efficient.

  • by flaming error ( 1041742 ) on Wednesday August 08, 2012 @12:30AM (#40914617) Journal

    You may be right that the $440 million changed pockets, but I doubt it. In the stock market, money appears and disappears like ocean mists.

    Say Bill Gates has a billion stocks, they're worth $5 each, he's worth $5 billion on paper. Stock goes down to $4, he just lost a billion dollars. Nobody made those billion dollars, they just evaporated like the ether they always were.

  • Re:Luddite (Score:5, Informative)

    by Dunbal ( 464142 ) * on Wednesday August 08, 2012 @12:54AM (#40914749)

    In your world the ideal market is a place where no one can ever trade. In my world the ideal market is where anyone can trade almost instantly at or near the desired price. Guess which one is closer to what HFT actually is? Don't let your jealousy of the rich man being able to roll over his capital much easier than you cloud the fact that no one is forcing you to complete a transaction. HFT is only providing a solution to the supply/demand of the market at any given point in time. It does not make the market. It does not force you to sell a share. It does not force you to buy a share. It does, however, enable you to sell your shares almost instantly at the asking price. And it does enable you to buy stock almost instantly at the bid. Now if you're a day trader trying to make money off the spread, HFT will eat your lunch. If you're an investor, however, HFT is your friend.

    Strangely enough, the actual number of shares traded [] is declining after having peaked a while back, which seems to fly into the face of people who think that HFT is skewing the market. You'd think that if HFT businesses were just rolling the same cash over and over, this would increase the total number of trades and thus add to the overall volume of the market. But no, that's not the case. What's happening is that when their algorithms want to buy stock, they will buy it from you faster than anyone else. And likewise on the other end of the transaction. How does this affect you, if you manage to make the trade you were going to make anyway?

    The REAL problem with the market is government money printing which is now pouring trillions into the market every year so that stock prices inflate not because of any actual connection to a company's performance, but because the economy is so bloated. It wouldn't matter if the market only went up, but the higher you go, the further down you get to fall when falling time comes...

  • Re:Luddite (Score:5, Informative)

    by SerpentMage ( 13390 ) on Wednesday August 08, 2012 @06:57AM (#40916371)

    No the problem is that it will not disappear because it will move to the side. Case in point UK. They have a stamp tax on stocks. What happened? The financial industry created CFD's Essentially these are leverage products that trade on top of the stocks (sorta like futures) are not subject to the stamp duty. Granted they don't get the stock benefits, but they still warp the market.

    As somebody who works in the market, the solution is to introduce a 50 ms holding rule. It would work as follows. You put in a bid, or ask. The moment it goes onto the market you have a 50 ms waiting period before you can put in another bid or ask. You can cancel your original bid and ask within 1 ms, but you cannot put in another one until your 50 ms is up. This action will introduce a delay and slow the market down.

Machines that have broken down will work perfectly when the repairman arrives.