High-frequency trading is creating a ruckus on Wall Street. Marketplace Senior Editor Paddy Hirsch explains what high-frequency trading is and why some people are up in arms about it.
Golden Networking (http://goldennetworking.net) is organizing the High-Frequency Trading Experts Workshop 2010 (http://www.HFTExpertsWorkshop.com), â€œPractical Implementation of High-Frequency Trading Strategies," on December 9th and 10th in New York City. It has been recommended for executives in finance and investments who work at Investment Banks, Hedge Funds, Pension Funds, Broker Dealers, Consultancy Groups, Prime Brokers, Solution Providers and Exchanges and wish to gain a thorough understanding and practical knowledge of high-frequency trading.
I dont see the point of buying all available shares in the market. The investor wants to buy at 25 dollars at max. The current price is 24.50. When the HFT sends out the 25 dollar offer and buys the rest of the shares in the market then those other shares will be either less or above 25 dollars. If they are above 25 dollars, the HFT will lose money on selling them to the investor for 25 dollars - so thats a no go. If they are less than 25 dollars, then why did the investor not buy these share himself? Because he is not quick enough?
Small error/omission in Paddy Hirsch's whiteboard on HFT. The liquidity rebate applies to limit orders only, so to say that a trader gets a rebate on *every* share traded is incorrect.
I look forward Paddy Hirsh's whiteboards. They are so simple yet covers teh subject so well.
However in this case, I think he started off very well explaining HFT but lost out in the middle.
* Should have explained how a $24.5 bid is met by $25 ask.
* Program trading needs more explaining
* Good example on Flash trading - Very simple for a street guy
* Can we have a session on the type of algos these 'v.intelligent' techies in the wall street creates.
Thanks for the report.
I am so tired of people leaking money out of the economy in ways such as this. An investment is supposed to support the work of others in industry, then all share in money made out on the street. When an "investment" makes money by teasing industry with churned money, there is only benefit to the churner, and industry withers and dies.
I enjoyed the presentation by Mr. Hirsch but he perpetuates the myth that the people who write these algorithms are very intelligent and therefore very expensive. Having been a research director for major Wall Street firms and having been quoted in major finance journals I think I have a bit of a grasp on this crowd's general level of sophistication. Most of this stuff is not rocket science, and the vast majority of these programmers, developers and researchers are paid huge sums simply because the firms make large amounts of money on the back of increasingly opaque instruments and techniques. There are just as intelligent people elsewhere. Reports (like this one) stating that those involved in quantitative trading techniques are somehow at the top of the intelligence chain are vastly exaggerated.
I listened with fascination and dismay to your piece on high-frequency trading. The relationship between a market and the society in which it thrives is that between a parasite and its host, mutually beneficial provided that it remains in balance. Adam Smith's invisible hand assumes that self-interested trading is of benefit both the society and the market. But society benefits from the well-considered direction of resources, but individual traders benefit from anticipating the decisions of other traders, even by milliseconds. Trading faster benefits noone but the traders. Could you please ask somebody what the social gain is from high-frequency trading? If they say that it creates a more efficient market, could you then ask them to define efficiency very carefully? Phil Roe
This is just another example of how capitalism has changed for the worse. Creating something has been substituted for creating nothing. How does this help the economy grow, help Americans, help the world? It doesn't! Why does the SEC allow this practice?
OK job on the explanation, but he used a very bad example. So this video really doesn't explain how the fast-trader makes money on the $24.50 bid $25.00 ask trades. Unrealistic to think spreads are so wide that a flash order to sell at $27.00 would be met with anything other than delivery to a long stack of lazy orders in the system, same for $26.00 order to sell. Give people a realistic example, we aren't dummies.
I also don't buy that the fast-traders can't tell the orders are coming from the same buyer. There's SOME anonymity to the order postings, but there's also some id/traction on the buyer depending on the exchange. So you should also use real exchanges in your examples.
Also, you make it seem like these "algorythms" are so complicated, no one bother to explain them. They aren't that complicated, I assure you, no more than some options math which most people with a business degree (95% of Wall Streeters and a good percentage of Main Streeters) can understand.
So overall I give this video a 3 stars out of 5. A 10 year old child should be able to understand this stuff, it's really not that hard how big Wall Street firms clip money off institutional and retail orders. Institutions ought to get a GOOD 5-star explanation for all the money they are paying middlemen, THEN maybe you'd get some market solutions, instead of crying to the government-- whom will inevitably botch this thing up even worse than it already is. After all, where do you think politicians get their money? That's right, from the guys making all the easy money. So don't expect anything good to happen if gov't intervenes, it'll be more of the same, and worse.
There is only one solution, and that's to offer a market with truly opaque order flow, with only one settlement engine for matched orders. Unfortunately, the existance of such markets have been tried in the past, and the liquidity directors (big banks) direct their volumes elsewhere, to other markets that don't prevent them from making the easy money. So unless I'm missing something, nothing will ever change.
The best thing to do is for the gov't to let big banks fail when they screw up. At least it gives more honest hard-working firms some reward for doing a better job for customers. What we did in the past year is deplorable, handing the bandits bullets. I prefer new bandits, the old ones need to learn their lesson which greed bestows on them.
I googled "liquidity rebate" to find out more and found many results saying the NYSE started offering liquidity rebates March 1 2009. Did they get rid of it again or was that part of the whiteboard incorrect?
PS- I <3 whiteboard. Thanks!
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