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70% Of All Stock Market Trades Are Held For An Average Of 11 Seconds


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Interesting example.

What's just happened to those who would attempt to extract a rent from houses in these glutted times?

What's just happened to the price of the underlying?

Where has the capital gone?

And yet these same banks are more leveraged than ever - so the capital isn't there, either.

Where oh where could it be.

Okay, capital is such a slippery term.

Financial "capital" has been destroyed. Money from a rosy future has been brought into the present by credit, but now that future doesn't exist so prices drop across the board and a lot of the financial capital that existed before doesn't anymore. Initially the debt remains so the wealth still sort of exists, but then that has to be written off too. But money is just a numbers game. It isn't real capital.

Real capital is things: labour, land, and objects that have been produced that can be used for production.

The houses in Nevada have been a complete waste of all the above three things (labour, land, tools or production.) Much of the internet buibble was the same thing.

Yes, the market corrects, but this doesn't mean that an awful amount of destruction doesn't occur. The problem is that bubbles, which are inefficient uses of capital in any meaningful sense of the word, are self reinforcing. It makes sense to gamble on them...one just has to make sure that you get a chair before the music stops.

Excuse me for asking, but who owes corporate stock holders (or more correctly - large pension funds, let's call a spade a digging implement here) two and a half decade's worth of free lunches?

Yes, I do believe that this system redistributes our meagre savings, and does so exceedingly well.

Who owes the CEOs of failed companies £16 million of pension contributions and a similarly fat paycheck? Fact is, the real share holders' proxies (the pension funds) aren't doing their jobs in keeping management in line. Management are just employees - they don't own the company - yet they seem to be capturing greater shares of the profits than in the past.

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The reality is that our capital is quickly redistributed such that yields are minimised. That is not the same as being redistributed towards efficient production.

+0.9. Not completely sure about quickly though. Most bubbles take enough time to cause serious damage, and overshoot. The self reinforcing nature of bubbles means that for a long time short term capital appreciation gets confused with real yield and people, being people, don't understand exponential functions. If people were all identical, rational, and all had the same perception of the real yield the price of the producing asset would rise until the excess yield was removed and then would stop as the whole world agreed that there were no more windfalls to be had. (To make matters even worse, due to the fact we are not all clones and of the same age, and all have different perceptions about the future (e.g. what long term interest rates are going to be) we all have different functions mapping risk into utility so comparison of yields across asset classes is an individual thing.)

Once all yields are minimised and all arbitrages removed (yield is just the result of some arbitrage after all), then I would agree that markets will move capital exclusively to more productive uses.

But this will never happen. All you need is a slight fluctuation, either through noise or a real change in circumstances for one asset to have a slightly higher yield than others. This is the seeds of a bubble as money pouring into the asset creates capital appreciation over and above the "real" yield and off we go again.

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Define "privileged access to order flows".

Of course there is always some privilege. It is the degree. A broker front running me is clearly wrong as I am employing him to buy shares for me. Flashes of orders before they hit the market on which the share is properly listed feels like a step too far to me - Emmanuel Derman appears to agree so it isn't just me and other "nutters" who thinks this is somehow "wrong.". Of course you then run into issues about other perfectly reasonable trades. I want to shift shares from a personal trading acccount to a pooled ISA, so my dealer gets in contact with a market maker who says he will do it for a spread that nets him £30 or £50. Seems fair to me, but that transaction isn't far off from being the equivalent of a dark pool as no one else had a chance to intervene in the two trades.

I'm not a fan of flashes either - if your beef though is with selective enforcement of existing regulations or laws, why not just say that?

I don't think anyone would take issue with that stance.

Because this particular forum topic is centred on the short periods of time a lot of shares are held for. In general, yes, selective (or non) enforcement of regulations is part of the real problem. Accountability and counter productive incentives (from a society perspective) screw up all sorts of things too. What is best for me as an individual may, if applied universally, bring misery upon me and my fellow men. Tragedy of the commons etc. It is why we have regulations and why they need to be enforced.

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It's not only possible, it's highly probable in illiquid instruments.

My own assessment is that what you have witnessed is the middle of the book being hoovered clean out by someone far larger and faster than you (which in my view is a good thing, nobody owes you any rent, either - if you're not the most efficient in execution, you lose, and are motivated to improve).

This happens all the time, particularly where the market maker has exactly zero reason to add liquidity (such as the kind of finely balanced - one majority owner selling to one large buyer buying - market you've outlined).

Well, yes my lesson was to remove my stops in such shares. (It was a sizeable number too. At the time I held about 250,000 and "lost" 100,000 of them. I wouldn't weep as I made over 100% on the deal in the long run, it is just that 200% would have been nicer.)

Still, the point is that if this was all done by a dealer (and the share was not volatile) then I suspect the market makers were not sticking to the LSEs maximum spread regime for the share. Unless of course the offer was being automatically created by a market maker whilst the bid was being driven by the dealer as you hypothesize, the MMs bid staying below the market.

Whichever way you look at it though, it was gaming the system. If it was solely due to a MM, then I'd say it was wrong. If it was as described in the previous paragraph, then I suppose it would be legitimate if not deserving of a fast track through the pearly gates.

Remember the hoary old chestnut about HFT's increasing liquidity?

If any HFT had been sufficiently interested in the instrument concerned to trade around the market maker's price bands, the book would've been replenished far more quickly than it was.

In short you've just documented the "pro" case...

We are getting two issues conflated here. Yes, in this case there would have been some advantage. On the other hand, the problem was, again, a significant asymmetry of power and access. Most of the people getting swept up would have been small investors many I suspect who would have stepped in if they had known in time. I suppose it is one of the dangers of being a small investor in such shares as although I would condemn the behaviour as unethical, you couldn't regulate against it and probably shouldn't expect someone to behave any other way.

1/ Nobody complains about flash "surges"

2/ Every flash "surge" is a flash crash in yields

From this I conclude that people fall into two camps :-

1/ People who can't accept their own faults (HFT ate my money, much like the dog ate my homework)

2/ People who want to exercise control over third parties (I forbid you to discover utility where I have failed)

No, in general, people aren't really great at understanding dual spaces. I do, and I don't like flash surges either. I reckon a lot of short sellers would have something to say about flash surges as well. In any case, it is the surge/crash spike that then returns more or less to where it was previously that is the concern. I also wonder about how much some of the oscillations that occur around news are aggravated by algorithmic trading. Increasing volatility imposes risk costs on others, especially smaller traders who have less sophisticated tools, such as stops, to handle risk - it isn't neutral. (This, by extension applies to smaller hedge funds, and pension funds etc. - they too cannot afford to have as many quants and their black boxes as close to the market servers as JP Morgan et al.) It is a form of market distortion. Where once upon a time major components of volatility might consist of "news" and a seller/buying wanting to divest themselves of/buy a large block of shares, now we have the possibility that the market might drop precipitously by 10% because of some computers amplifying a small, perhaps incorrect or irrelevant, signal. So, I must adjust my attitude to the reasonable width of stops, which means I must pay a price in some form. cf. your previous comment about putting a price cap on volatility options. Duality works both ways. I'm not saying that there was once a golden age, but perhaps we shouldn't be encouraging it further.

When UAL stocks fell 50% because a news wire fed an old story which was picked up by the news reading algorithms people were, in my opinion, ripped off. Or to put it less emotionally, they paid the costs of volatility introduced by the big players. The big boys are not paying for the "externalities" they are creating. Their nickel and diming is making steam rollers for us cripples who cannot get out of the road quick enough. They are creating costs that the smaller players pay. This is where regulation has to come in.

Over and above this, I think the problem I have with your conclusion that there are two types of people is that it is sort of missing the wood for the trees. Part of the problem is, in my view, is that markets aren't so much about value but about price. (This is nothing new, but I think we are exacerbating it.) The extra-volatility is a refelction of the (non)functioning of the market with respect to value. It is economic friction. On a longer time scale it is what happens to housing over 18 year cycles. Both are inefficient and a waste of resources/capital.

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China's balance of trade figures are wishful thinking?

Ok... I guess the penguins stomping around in clown shoes should've alerted me that this reality was the dream.

china's trade balance has nothing to do with markets - it results from state intervention in the best possible mercantile tradition.

Meanwhile, on the other side of the world its quite clear that our financial and equity markets act to reduce yields, not facilitate productive investment. The evidence for this is all around : high house prices, high PEs, low interest rates and hot money flows into emerging markets, aussie property, icesave etc.

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