NY Times: High Speed Trading


H

honda.lioness

I am trying to make sense of some statements in today's NY Times on this. The article appears at http://www.nytimes.com/2012/10/15/business/with-profits-dropping-high-speed-trading-cools-down.html?exprod=myyahoo. Excerpts:

"Profits from high-speed trading in American stocks are on track to be, at most, $1.25 billion this year, down 35 percent from last year and 74 percent lower than the peak of about $4.9 billion in 2009, according to estimates from the brokerage firm Rosenblatt Securities. By comparison, Wells Fargo and JPMorgan Chase each earned more in the last quarter than the high-speed trading industry will earn this year."

"The firms also are accounting for a declining percentage of a shrinking pool of stock trading, from 61 percent three years ago to 51 percent now, according to the Tabb Group, a data firm."

Elsewhere on the NY Times site is this definition:

"Trading mostly with their owners’ money, [high speed traders] scoop up hundreds or thousands of shares in one transaction, only to offload them less than a second later before buying more. They can move millions of shares around in minutes, earning a tenth of a penny off each share."

But don't they often lose a tenth of a penny per share, too?

All I can think is that (1) 51% represents an amazing amount of gamblers moving in and out of stocks; and (2) isn't the approach these firms use simply "momentum investing"? There may be a net profit this year but I would think there is a net loss in other years. When a net profit occurs, it is luck.

Should a buy-and-holder who looks at a stock's fundamentals (and certainly not nanosecond-by-nanosecond momentum) care about high speed traders?

I am not worried, but I am intrigued by all the commenters who say this "technique" <wink> of trading stocks needs government regulation.
 
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T

Tad Borek

I am trying to make sense of some statements in today's NY Times on
this.

Should a buy-and-holder who looks at a stock's fundamentals (and
certainly not nanosecond-by-nanosecond momentum) care about high
speed traders?

One criticism I've heard that would affect a buy & hold mutual fund
investor, even one sticking to broad-market index funds, is that the
existence of HFT firms has brought down the size of orders and made it
more difficult to fill larger blocks vs. in the pre-HFT market. That
wouldn't affect individual investors buying small lots of individual
securities, but could act as a sort of drain on their mutual fund holdings.

I don't know if that's actually true, but if it is, the mutual fund
would see larger execution costs (not from commissions, but from market
impact and spread costs). That should show up in index funds as tracking
error, meaning deviation from the return of the index, resulting from
the additional trade costs. So far I'm not aware that it has shown up in
the larger index funds. Front-running and market impact from big orders
was a part of the old market as well, so the cost may have already been
there, just in a different form (a guy on the phone, not a computer
sniffing out the existence of a large order).

I think you're right that certain aspects of HFT look little different
from other short-term speculation, which in aggregate should be zero-sum
minus costs (i.e. a losing strategy unless you're the house). It seems a
bigger piece, though, is more like being the house - meaning traditional
market-making and arbitrage trading, where the participants manage an
inventory of securities and earn market-maker profits. There are more
warehouses and they flip their inventories much more often, but that is
still a valid business; somebody has to make markets in securities and
can expect to be compensated for that.

-Tad
 
H

honda.lioness

It seems a bigger piece, though, is more like being the house - meaning traditional
market-making and arbitrage trading, where the participants manage an
inventory of securities and earn market-maker profits. There are more
warehouses and they flip their inventories much more often, but that is
still a valid business; somebody has to make markets in securities and
can expect to be compensated for that.

I now think the article I cited above misses the boat. Elsewhere in the last few years the Times has reported that these "high speed traders" see orders before others can, due to a loophole in the laws and/or superior technology. This allegedly include being physically closer to the exchanges, so the time of transmission allegedly is shorter and a computer-run algorithm can pounce when it sees orders piling on and take advantage of movement on a stock on a milli-second (or whatever) timescale. If this is all true, then the profits won't balance out with losses.

I am not sure why they have so much access to orders. I sure don't.

Thanks for posting your interesting insights.
 
A

Avrum Lapin

I now think the article I cited above misses the boat. Elsewhere in the last
few years the Times has reported that these "high speed traders" see orders
before others can, due to a loophole in the laws and/or superior technology.
This allegedly include being physically closer to the exchanges, so the time
of transmission allegedly is shorter and a computer-run algorithm can pounce
when it sees orders piling on and take advantage of movement on a stock on a
milli-second (or whatever) timescale. If this is all true, then the profits
won't balance out with losses.

I am not sure why they have so much access to orders. I sure don't.
The high speed traders have access to a broader bandwidth connection to
the exchange and so can receive the data faster. (Not sure if the
exchange has different size pipes and/or the high speed traders just use
a broader bandwidth). The exchange gets a higher fee for broad band
data than narrow band data. The high speed traders have also invested
in algorithms and high speed computers.

What bothers me is that I believe that the higher speed traders cause
more market volatility and I either as a buy and more or less hold
investor or my mutual fund is at a disadvantage in working in a highly
volatile market.
 
R

Rich Carreiro

Avrum Lapin said:
The high speed traders have access to a broader bandwidth connection to
the exchange and so can receive the data faster. (Not sure if the
In addition, the high speed traders pay extra $$ to co-locate their
computers in the exchange. That way the speed of light (and/or
speed of electricity) delays are smaller (remember, at light speed,
1 foot equals 1 nanosecond of delay) and so they are seeing the action
literally before those who have computers off-exchange.
 
R

Rich Carreiro

Avrum Lapin said:
The high speed traders have access to a broader bandwidth connection to
the exchange and so can receive the data faster. (Not sure if the
In addition, the high speed traders pay extra $$ to co-locate their
computers in the exchange. That way the speed of light (and/or
speed of electricity) delays are smaller (remember, at light speed,
1 foot equals 1 nanosecond of delay) and so they are seeing the action
literally before those who have computers off-exchange.
 
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Ron Peterson

Should a buy-and-holder who looks at a stock's fundamentals (and certainly not nanosecond-by-nanosecond momentum) care about high speed traders?
Sure, the buy-and-hold strategy is affected by high speed trading because stock prices might go higher than one's target price.
I am not worried, but I am intrigued by all the commenters who say this "technique" <wink> of trading stocks needs government regulation.
It needs government regulation because some of the sales create naked shorts.
 

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