High Frequency Algorithmic Trading

[1929crash]

ON vacation in Turkey, I am picked up at the airport by a minibus. It’s past midnight, pitch-black, the driver is speeding around corners. Only one headlight is working. And I have my doubts about the brakes. In my head I’m planning the letter of complaint to the tour company. And then the driver’s cellphone rings, he picks it up and answers it, he has only one hand on the steering wheel. Now I’m mentally compiling the list of songs to be played at my funeral.

That’s rather how I feel when people talk about the latest fashion among investment banks and hedge funds: high-frequency algorithmic trading. On top of an already dangerously influential and morally suspect financial minefield is now being added the unthinking power of the machine.

The idea is straightforward: Computers take information — primarily “real-time†share prices — and try to predict the next twitch in the stock market. Using an algorithmic formula, the computers can buy and sell stocks within fractions of seconds, with the bank or fund making a tiny profit on the blip of price change of each share.

Ful article at: http://www.nytimes.com/2009/07/29/opinion/...amp;ref=opinion

[Gigantic Purple Slug]

My people who program computers are better than your people who program computers. If so you make money 100x as fast.

Trouble is when my people screw up/your people are better you lose money 100x as fast.

Gutsy.

[cashinmattress]

It's a tough one to call really.

The US is looking to outright ban this frontrunning scheme, as it gyps all the conventional investors, but I really don't see how they could do it.

Just goes to show you that there really is no free market capitalism.

My thinking is that this has been in play for far longer than you'd think....and I find it really odd that GS let it slip about their software 'theft'. Just more manipulation I guess.

http://zerohedge.blogspot.com/2009/07/ron-insana-on-hft.html

High-Frequency Distraction

By Ron Insana

Portfolio Manager

7/27/2009 11:40 AM EDT

The New York Times and The Wall Street Journal are taking aim at a new form of computerized trading known as "High Frequency" trading. The algorithm-based trading is allegedly an illegal form of front-running, as high-frequency traders hook into exchange computers and use "flash trades" to suss out incoming order flow and use the lightning speed of their own programs to jump ahead of customer orders. Critics argue that individual investors are at a distinct disadvantage for this reason and a variety of others. The proximity of high-frequency computers, which can be placed next to exchange computers for a fee, allows for an almost-osmotic transfer of information. Senator Charles Schumer (D, N.Y.) is asking the SEC to ban "flash trades," which are phony orders placed by high-frequency programs that aim to fool market participants into entering orders. The programs jump in front of customer orders and gain a trading advantage. If that is indeed what is happening, it qualifies as "front-running," an illegal practice on Wall Street. If high-frequency traders are just faster than everyone else and not illegally jumping in front of others or paying off the exchanges to get preferential trading treatment, then this new area of technology-based trading is no less legitimate than the use of the telegraph, the telephone, the ticker, computers, handheld devices or older-style "black box" or "dark pool" programs that give sophisticated traders the ability to simply trade faster. I'd prefer that regulators look into whether a firm like Goldman Sachs (GS) -- whose former executives continue to run the New York Stock Exchange (NYX) ; advised on the merger between NYSE and Archipelago, and formerly owned a portion of the combined entity; own Speer, Leeds & Kellogg, the largest specialist firm on the Big Board floor; and control the greatest number of seats in the equity markets -- unfairly view order and information flow ahead of its customers and clients. I am far more concerned about that than I am about the emergence of "high-frequency" trading. But the press won't touch that topic. It's easier to go after the dreaded speculators and dark pool traders than lose access to the most profitable and prestigious firm on Wall Street.

[LuckyOne]

The next leg down in the markets will be the result of the fact that people understand that we are still in depressionary circumstances.

Things like QE. fiscal stimulus and H-FAT can speed up or slow down the next leg lower but not change the result.

They impact the pace but not the outcome.

Edited July 29, 2009 by LuckyOne

[1929crash]

Just goes to show you that there really is no free market capitalism.

[Dorkins]

Seems to me that this will be a good thing in the long run as when it becomes widespread it will eventually bankrupt anybody who is trying to predict share prices based purely on the intraday price movements. That particular game is nothing but predicting the irrationality of other people in the market - real value in companies cannot possibly change that fast. The less human irrationality there is in the markets, the fewer bubbles there will be.

[@contradevian]

Seems to me that this will be a good thing in the long run as when it becomes widespread it will eventually bankrupt anybody who is trying to predict share prices based purely on the intraday price movements.

Not if the main perpetrators are TARP funded banks like Goldman Sachs with massive political influence.

[blankster]

Stock markets should introduce a minimum holding period for shares - possibly 7 days - that way investors would be more involved with the medium-term prospects of a company and not whether they can ride a blip of a few hours and come out with a profit.

[TheEmperorHasNoClothes]

Ful article at: http://www.nytimes.com/2009/07/29/opinion/...amp;ref=opinion

Ultimately this will be a zero-sum game. You make money by someone else losing money. Might as well set up a $100m stakes poker tournament for the uber-rich, then get them to write a computer program to try to beat each other.