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Don't fear high-frequency trading
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Bill Radke: We talked earlier in the show about how small investors are fleeing the stock market. We gave some possible reasons -- maybe they're nervous about the economy, maybe they prefer the safety of bonds. Or maybe people are just still freaked out from the "flash crash".
Remember the stomach-dropping plunge this spring when almost 1,000 points just vanished from the Dow in just a few minutes, and then reappeared just as fast? Well, a group called the Financial Industry Regulatory Association is still struggling to explain exactly what happened. But over the weekend, it announced a probe that could lay some of the blame on high-frequency trading. We've told you about these -- those high-tech,
high-speed computer trades that now account for most of the buying and selling on Wall Street.
Well, commentator Matt Samelson says high-frequency trading might sound intimidating, but let's not make it the enemy.
Matt Samelson: Wild swings in the stock market always trigger a hunt for a bogeyman. Short sellers used to be the favorite target for blame, then algorithmic traders. Today, it's high-frequency trading.
It's easy to blame high-frequency trading, because most people know little about it. Talk of superfast computers and complicated algorithms makes it sound like a sinister plot line in the movie "The Terminator."
In reality, high-frequency trading is quite simple. It generally involves the frequent buying and selling of securities to profit from small changes in prices. The computers used in high-frequency trading are extremely smart: They're programmed to spot the best time to make the trades. They're quite fast, too: Orders are often executed in about one-ten thousandth of a second.
Being faster, and maybe even smarter, than a human trader isn't a bad thing. High-frequency strategies squeeze every ounce of value out of the market in ways that humans can't. They add value in other ways, too. In some instances, they buy and sell stock purely to collect rebates. By doing this, they provide shares that otherwise wouldn't be available, easing the pressure of supply and demand. They also identify stocks in which the market price has diverged from fundamental value. In taking advantage of these instances they correct the mispricing, pushing market prices back in line with fundamental price.
In other words, rather than creating problems in the market, high-frequency trading often solves them. It provides more stock for people to buy and sell, it often results in better execution prices, and it helps smooth out the ups and downs in price movement.
Nobody has yet managed to work out what caused the near 1,000-point drop in the Dow on May 6, but we do know that high-frequency traders helped correct the problem. The tremendous drop in the market prices of certain securities was stopped fairly rapidly thanks to high-frequency traders. They were the first to see prices were far lower than they should have been. They bought in, and they drove the market back, almost to where it had started.
It's true that high-frequency trading is reshaping our stock markets, and it's right that regulators should want to investigate. Hopefully, once regulators and legislators gain a full understanding of HFT, they'll see the enormous benefits that it can bring. Hopefully, then, we'll stop hearing paranoid rants about the rise of the machines.
Radke: Matt Samelson is a principal at the independent consulting firm Woodbine Associates.
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How does the IRS see HFT? We have long and short term capital gains taxes, but how does it work in following millisecond trades? How much of this activity is even reported? And how about a tax on really short term trades, say 80% on all trades held for less than 1 second, 50% on all trades held less than one minute. I'll bet that will help erase any deficits!
Dear Sirs, asking the fox about guarding the house security is the doublespeak you promoted on high frequency trading. This serves NO economic purpose other than enriching traders who are predators on the rest of us. No wonder that small shareholders like my family are moving into bonds. We are tired of being plundered by the Friends of Obama,Friends of Bush, Friends of Both Demicans and Republocrats. No wonder the US middle class is being destroyed when even NPR has sold out.
This commentary smells of the beginning of a long PR fight to defend hedge fund HFT manipulation of the stock market against the wrath of the public. Maybe he should clarify how Nanex's hard data of quote-stuffing is somehow making our lives better? It's not. Here's to hoping FINRA wakes up and brings the hammer down on these guys.
Marketplace should be ashamed of this broadcast. It was pure propaganda from a firm that profits from supporting HFT. One must look at the increase in volatility of the stock market in the last two decades which coinciding with the huge rise in trading volume driven by computer trading. The same people who are bringing us HFT brought us CDOs, CDSs and other "brilliant" new innovations based on computer models. Mr Samelson gives no figures to support his assertions. The traders have pushed out the investors. And what so we get, a stock market that is driven aground, from 2000 to 2008 there was no increase in the Dow, the first eight year stretch of no increase since before WW II.
Good grief!
So, mutual fund companies have been telling us for years, and are still telling us to buy and hold for the long run. Then they, and others, rush in and do just the opposite.
Instead of buying stock because one believe in the company, these "high frequency" traders are just buying and selling to make a buck, irregardless of a company's merits. I have just one word for this: Shameful!
I'm not surprised to see Marketplace touting HFT. Their coverage of business in general is actually anti-business, and ignorant at best. I suspect they are deliberately anti-business.
HFT only benefits the HFT trader. ZeroHedge (an infinitely more knowledgeable source of info for the market) has nothing good to say about HFT.
The average consumer is harmed by HFT due to the ability of HFT traders to insert themselves into the trade.
Listening to today's broadcast I was actually laughing at the propaganda. Anyone who contributes money to a NPR-affiliated station should be embarrassed.
George Orwell, indeed!
Mr. Samelsen is an excellent salesperson for High Frequency Trading. I listened with interest to his position detailing how this software might benefit the market and, in turn, Marketplace's listener, the individual investor.
Unfortunately, he lost me right after he said, " Being faster, and maybe even smarter, than a human trader isn't a bad thing. High-frequency strategies squeeze every ounce of value out of the market in ways that humans can't."
Plain and simple, these two sentences are doublespeak. Humans code the algorithms that run in the HFT software: nothing is being squeezed out of the market that the human engineers didn't acknowledge and account for.
However, the individual investor doesn't stand a chance against the superior efficiency of the high end SFT software. Those who benefit most—and most frequently—are the investment houses who employ the software and their largest institutional investors. This is what Mr. Samelsen hints at when he says, "In some instances, they buy and sell stock purely to collect rebates. By doing this, they provide shares that otherwise wouldn't be available…"
I don't know the intention of the segment, whether it was meant to be educational, informational, or merely anecdotal but it came across with all of the (in)sincerity of a paid endorsement.
Next time, perhaps a more well-rounded discussion of both the pluses and minuses of some aspect of the market would be in order. That is the reason I listen to Marketplace: to gain greater perspective.
If high-frequency trading is so good at correcting "mispricing, pushing market prices back in line with fundamental price" (as Mr Samelson contends) then why did the housing market bubble and its aftermath take the better part of a decade, instead of a few ten thousandths of a second?
Stock market trading must conform to the same rules that govern physical systems. Trends in trading are amplified and damped out. There is feedback that can cause upward spirals, downward spirals, oscillations and other instabilities. “High Frequency Trading†is not just a scapegoat. The problem is that HF Trading can promote price instability that is not connected to fundamental value. Instability frightens away long-term investors who would otherwise do their research to build their nest eggs.
Trading rules need to promote a responsive market while avoiding instabilities. One engineering approach would be to add significant random time delays to High Frequency Trading. This would reduce correlation of individual trades that could bring down the market with a great big thud.
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