Author Topic: Stock Market Rigged for Average investors!! 60 minutes  (Read 15143 times)


arebelspy

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #1 on: March 31, 2014, 07:45:23 AM »
I hate headlines like that.

The whole market isn't "rigged."  High Frequency Trading exists.  It makes short term trading very difficult.

For those of us who buy and hold and view stocks as ownership of a company (and would be fine owning those companies if the market shut off for 10 years ala Buffett), a fraction of a percent higher on the purchase price due to HFT doesn't affect us in the slightest.
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hybrid

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #2 on: March 31, 2014, 08:03:30 AM »
I watched the report last night and am aware of high frequency trading and the perversions it creates. But if I were considered an average investor who trades a fair bit, and I guess I am, it's not the sort of thing that affects me. I have more trading tools available to me than ever (especially the trade trigger, which fires off a trade when a particular condition is met), and a penny or two difference on a trade won't affect me in the long term.

I still find the whole thing troubling however, and I hope some common sense reforms are in store going forward (such as limiting the number of times a stock can be bought and sold in a day).

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #3 on: March 31, 2014, 08:14:05 AM »
I watched the report last night and am aware of high frequency trading and the perversions it creates. But if I were considered an average investor who trades a fair bit, and I guess I am, it's not the sort of thing that affects me. I have more trading tools available to me than ever (especially the trade trigger, which fires off a trade when a particular condition is met), and a penny or two difference on a trade won't affect me in the long term.

I still find the whole thing troubling however, and I hope some common sense reforms are in store going forward (such as limiting the number of times a stock can be bought and sold in a day).



Yea i too am not worried about a pennies here and there but agree totally that some reform is needed.

warfreak2

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #4 on: March 31, 2014, 08:20:40 AM »
If HFT really does simply function as a small tax on all transactions (I'm not convinced that it does), I think the conclusion should just be that the market can apparently sustain such a tax and therefore the government should impose one. According to this hypothesis, such a tax would make HFT unprofitable, and have no net result for anyone else, with the fractions of pennies collected by the government instead of the algorithms.

I don't think limiting the number of times a stock can be bought and sold in a day is a good idea; where possible, it's better to tax than to ban. A tax on selling stocks when the same person bought the same stocks in the same day; this way HFTs can be made unprofitable but traders can still react to multiple news events on one day without being forced to hold onto stocks they don't want.

hybrid

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #5 on: March 31, 2014, 08:43:28 AM »
If HFT really does simply function as a small tax on all transactions (I'm not convinced that it does), I think the conclusion should just be that the market can apparently sustain such a tax and therefore the government should impose one. According to this hypothesis, such a tax would make HFT unprofitable, and have no net result for anyone else, with the fractions of pennies collected by the government instead of the algorithms.

I don't think limiting the number of times a stock can be bought and sold in a day is a good idea; where possible, it's better to tax than to ban. A tax on selling stocks when the same person bought the same stocks in the same day; this way HFTs can be made unprofitable but traders can still react to multiple news events on one day without being forced to hold onto stocks they don't want.

Hmm, perhaps, I'll mull that over.

Or, alternatively, the number is sufficiently high to allow reaction like you describe (6, 8 times a day?) while discouraging HFT. That was what I had in mind. While HFT remains legal adding a tax is just moving the goalposts. If a way to do it can be found profitably, it will continue to happen. I'd prefer that HFT, which serves only to game the system, go away entirely.

arebelspy

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #6 on: March 31, 2014, 08:55:02 AM »
If HFT really does simply function as a small tax on all transactions (I'm not convinced that it does), I think the conclusion should just be that the market can apparently sustain such a tax and therefore the government should impose one. According to this hypothesis, such a tax would make HFT unprofitable, and have no net result for anyone else, with the fractions of pennies collected by the government instead of the algorithms.

I don't think limiting the number of times a stock can be bought and sold in a day is a good idea; where possible, it's better to tax than to ban. A tax on selling stocks when the same person bought the same stocks in the same day; this way HFTs can be made unprofitable but traders can still react to multiple news events on one day without being forced to hold onto stocks they don't want.

100% agree.
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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #7 on: March 31, 2014, 12:31:38 PM »
I hate headlines like that.
The whole market isn't "rigged."  High Frequency Trading exists.  It makes short term trading very difficult.
Michael Lewis makes a pretty good living writing about financial misbehavior, and that trader was able to demonstrate that the way he made his trades affected the price he paid for them.

We've been trying to make the stock markets "fair" "legal" since the govt put one of the market's biggest manipulators, Joe Kennedy, in charge of the SEC in the 1930s.  I think the only way to achieve decent behavior is to give tax breaks to long-term investors while having the stock market's trading expenses paid by the short-term traders. 

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #8 on: March 31, 2014, 12:36:30 PM »
Isn't there already a tax on high-frequency trading, the short-term capital gains rate?

I'm not quite sure how this HFT is supposed to adversely affect the long-term investor.  Certainly my mutual fund investments seem to keep going up...

AlanStache

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #9 on: March 31, 2014, 12:52:34 PM »
HFT is profitable; therefore I must assume it is taking money out of the market and affecting share price.  Maybe it is pennies per share but one of the basic tenets of mmm is that little things add up.

I would assume HFT is still subject to short term holdings taxes but is still profitable. 

I would not favor a limit on round trips but rather an additional progressive tax rate the increases the the govt cut as the holding time goes down.  Perhaps starting somewhere around a minute or dozens of seconds.  These people are to brilliant and would get around any rules or regulations other than removing the profitability.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #10 on: March 31, 2014, 02:11:35 PM »
quote from article.  “They’re able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price,” says Lewis. “The speed advantage that the faster traders have is milliseconds…fractions of milliseconds.”

  It is scalping stock prices.  Mutual funds, 401K's, retirement funds, any group that deals with large purchases.  It effects everyone who owns stock, a 401k, IRA, etc.  The different in the buy/sell price of a stock should benefit one of the owners, not a HFT.
  HFT is at almost no risk, the most buys an sells happens within milliseconds.  So almost no chance of getting stuck with a stock that tanks. 
  The solution might be to prevent a buy and sell in less then a hour or day.  The purpose of the stock market it to allow companies to raise capital and others to invest.  HFT is gaming the system in a bad way.  Plus there is no good side to HFT.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #11 on: March 31, 2014, 02:21:12 PM »
quote from article.  “They’re able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price,” says Lewis. “The speed advantage that the faster traders have is milliseconds…fractions of milliseconds.”

  It is scalping stock prices.  Mutual funds, 401K's, retirement funds, any group that deals with large purchases.  It effects everyone who owns stock, a 401k, IRA, etc.  The different in the buy/sell price of a stock should benefit one of the owners, not a HFT.
  HFT is at almost no risk, the most buys an sells happens within milliseconds.  So almost no chance of getting stuck with a stock that tanks. 
  The solution might be to prevent a buy and sell in less then a hour or day.  The purpose of the stock market it to allow companies to raise capital and others to invest.  HFT is gaming the system in a bad way.  Plus there is no good side to HFT.

I thought I understood the market.. Then I read the article and watched the video..

if I put an order to by X shares of a stock at Y dollars, then that trade gets executed how is it prevented once some number of shares has been purchased?  This is by definition a race condition and should be prevented in the logic of the trading software.  It shouldn't matter what my network connection is or which CPU I attach to.  This is a backend security problem of the exchanges and the networking solution seems to be a hack of a work around.

The reason I make this comment was the description the RBC broker gave - It is like buying 4 tickets for a concert and being told half way through the purchase that the two other tickets are now more money.

warfreak2

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #12 on: March 31, 2014, 02:35:17 PM »
if I put an order to by X shares of a stock at Y dollars, then that trade gets executed how is it prevented once some number of shares has been purchased?
It isn't prevented, as such, it just isn't necessarily executed in full. If you want to buy X shares, they don't all have to come from the same seller, so it's not atomic. Buying 100 shares at $5, for example, you might find someone selling 50 shares at $5, and then have to buy the remaining 50 for $5.01 because the second seller noticed that those shares were in demand and figured you'd be willing to pay an extra cent on each. This is like that, except a lightning-fast robot bought the 50 shares from the second seller at $5 and then took their place offering them for $5.01.

marty998

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #13 on: March 31, 2014, 02:40:16 PM »
In a cold dark room in Sydney, 6 high frequency traders have paid a very large fee to locate their computer servers next door to the Australian Stock Exchange processing hub.

Each is connected to the ASX server by a fibre optic cable that is exactly the same length as the others. Your trades can never be quicker than these guys, and you will always be at a disadvantage.

I think a subtle distinction needs to be made between high frequency traders and algorithmic traders. HFTs are not inherently bad. They are just able to take advantage of information quicker than most.

Algo's are the real problem in my opinion. Our small caps on the ASX are so heavily manipulated it is not funny. If an insto investor wants to accumulate a big parcel they will cap the share price of the target company by selling a small parcel of shares every couple of minutes, and then hoover up large parcels when mum's and dad's get scared and sell out. Fundamental value doesn't come into it, it's designed purely to transfer wealth from the retail investor to the insto.

marty998

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #14 on: March 31, 2014, 02:43:35 PM »
if I put an order to by X shares of a stock at Y dollars, then that trade gets executed how is it prevented once some number of shares has been purchased?
It isn't prevented, as such, it just isn't necessarily executed in full. If you want to buy X shares, they don't all have to come from the same seller, so it's not atomic. Buying 100 shares at $5, for example, you might find someone selling 50 shares at $5, and then have to buy the remaining 50 for $5.01 because the second seller noticed that those shares were in demand and figured you'd be willing to pay an extra cent on each. This is like that, except a lightning-fast robot bought the 50 shares from the second seller at $5 and then took their place offering them for $5.01.

Yes, couldn't have put it better myself. Works the same way for selling too. Only way to stop that is to never buy/sell "at market". Always put your order in "at limit" i.e. nominate a price and join the queue.

warfreak2

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #15 on: March 31, 2014, 02:48:25 PM »
I think a subtle distinction needs to be made between high frequency traders and algorithmic traders. HFTs are not inherently bad. They are just able to take advantage of information quicker than most.

Algo's are the real problem in my opinion.
I pretty much agree with this, but I also do think it's perverse that you can get an advantage from being microseconds faster. The real problem there is that stocks are bought and sold with BUY and SELL orders, rather than auctions: if buyers or sellers could wait a few seconds, or days, to see if they get a better offer, then there's no advantage to be had by offering faster than anyone else.

I.e., the stock market protocol is not currently incentive-compatible.
« Last Edit: March 31, 2014, 02:49:57 PM by warfreak2 »

Jamesqf

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #16 on: March 31, 2014, 03:02:45 PM »
quote from article.  “They’re able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price,” says Lewis. “The speed advantage that the faster traders have is milliseconds…fractions of milliseconds.”

Humm...  But isn't that exactly what any dealer does?  Or indeed, any one* who buys & sells stocks?  You buy a stock at price $X, hoping to later sell at $X+something.  What exactly is the problem with doing it real fast?

Quote
It is scalping stock prices.

OK, so it is.  What exactly is wrong with that, or with scalping tickets, FTM?

Also note that the HFTs can't sell you that stock you wanted to buy at $X for $X+something if $X is all you're willing to pay, just as a ticket scalper can't get you to pay more than the list price of a ticket unless you think the event is actually worth the higher price.


...I also do think it's perverse that you can get an advantage from being microseconds faster.

So why does the exact length of time matter?  Is it fundamentally different from having bought those Microsoft shares back in 1985 instead of yesterday?

AlanStache

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #17 on: March 31, 2014, 03:05:21 PM »
Quote
if buyers or sellers could wait a few seconds, or days, to see if they get a better offer, then there's no advantage to be had by offering faster than anyone else.

Is that not basically what a Limit order is?  How would your system be different? Honestly interested.

xocotl

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #18 on: March 31, 2014, 03:10:06 PM »
The real problem there is that stocks are bought and sold with BUY and SELL orders, rather than auctions: if buyers or sellers could wait a few seconds, or days, to see if they get a better offer, then there's no advantage to be had by offering faster than anyone else.

I.e., the stock market protocol is not currently incentive-compatible.

If a buyer or seller could wait a while to see if they could get a better offer that would be exactly the same as granting them an option on the stock (with the people bidding in the auction granting the option). In other words, you would never want to bid in such an auction unless there was some sort of incentive being offered. And if you were to offer an incentive, you'd basically have a system that you could exactly simulate today with existing derivative markets.

Quote
if buyers or sellers could wait a few seconds, or days, to see if they get a better offer, then there's no advantage to be had by offering faster than anyone else.

Is that not basically what a Limit order is?  How would your system be different? Honestly interested.

Presumably with an auction, once someone bid you'd be guaranteed to at least get that amount, but could potentially get more (until the auction closes). A limit order is more like selling something on eBay with no bidding, just the buy-it-now option.

luigi49

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #19 on: March 31, 2014, 03:50:32 PM »
When was the stock market not ever rigged? :)   Whenever money is involved there will always people that will take advantage of the situation.

warfreak2

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #20 on: March 31, 2014, 03:53:12 PM »
...I also do think it's perverse that you can get an advantage from being microseconds faster.

So why does the exact length of time matter?  Is it fundamentally different from having bought those Microsoft shares back in 1985 instead of yesterday?
I'm not seeing how that is even a question about what I wrote, I was talking about responding faster than other sellers, not about holding stocks only for short periods of time. But microseconds-long and years-long response times are fundamentally different because normally, a buyer or seller is willing to wait a few seconds (or days) after the first offer to see if there is a better offer, but not willing to wait a few years. E.g. when selling a house, you don't just give it away to the first person who offers what you asked, but you aren't going to hold out for years for a better offer.

Quote
if buyers or sellers could wait a few seconds, or days, to see if they get a better offer, then there's no advantage to be had by offering faster than anyone else.

Is that not basically what a Limit order is?  How would your system be different? Honestly interested.
I'll admit that I had to look up the definition of a limit order to check, but a limit order's time limit is decided at the time the order is placed, whereas a typical auction is extended when an offer is received, which prevents Ebay-style "sniping". They are something of a solution, but I think they still aren't quite incentive-compatible, and they at least don't eliminate race conditions.

warfreak2

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #21 on: March 31, 2014, 03:56:32 PM »
If a buyer or seller could wait a while to see if they could get a better offer that would be exactly the same as granting them an option on the stock (with the people bidding in the auction granting the option).
Not an option, because when the auction ends, the seller (or buyer) is committed to selling (or buying) at the highest (or lowest) bid.

xocotl

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #22 on: March 31, 2014, 04:49:06 PM »
If a buyer or seller could wait a while to see if they could get a better offer that would be exactly the same as granting them an option on the stock (with the people bidding in the auction granting the option).
Not an option, because when the auction ends, the seller (or buyer) is committed to selling (or buying) at the highest (or lowest) bid.

Being committed to engage in a transaction if prices move in your favor, at the new favorable price, isn't a drawback though. In a liquid market that commitment has no cost because if the bid has moved in your favor you can just immediately buy (or sell) the stock back if you didn't really want to commit to it. Unless you're suggesting we totally get rid of the spot market? In which case you'd probably have to set a minimum length on these auctions to prevent people from simulating the spot market by opening an extremely short auction.

warfreak2

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #23 on: March 31, 2014, 05:10:47 PM »
Not an option, because when the auction ends, the seller (or buyer) is committed to selling (or buying) at the highest (or lowest) bid.
Being committed to engage in a transaction if prices move in your favor, at the new favorable price, isn't a drawback though.
But if the spot price at the end of the auction is higher than what you bid, the seller is still committed...

It's an auction. Auctions are reasonably well understood. Bidding is incentivised for the same reason it is in any other auction - if your bid wins, then you get to buy (or sell) at the price you chose.

chasesfish

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #24 on: March 31, 2014, 05:31:41 PM »
I really enjoyed the fact the IT guy who figured this out and a few other investors already created a free market solution with their new exchange before Michael Lewis can write about it.

What an awesome story about an entrepreneur figuring this out and beating the big guys at their own game.


xocotl

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #25 on: March 31, 2014, 06:13:30 PM »
Not an option, because when the auction ends, the seller (or buyer) is committed to selling (or buying) at the highest (or lowest) bid.
Being committed to engage in a transaction if prices move in your favor, at the new favorable price, isn't a drawback though.
But if the spot price at the end of the auction is higher than what you bid, the seller is still committed...

It's an auction. Auctions are reasonably well understood. Bidding is incentivised for the same reason it is in any other auction - if your bid wins, then you get to buy (or sell) at the price you chose.

I think auctions only make sense for illiquid markets or non-fungible goods. In a liquid market for fungible goods (like stocks), the winning bid (if the auction is selling something) should never be lower than the spot price. If it were, there would be an arbitrage opportunity -- someone could bid somewhere between the current winning bid and the spot price right before the close, then turn around and sell it on the spot market for immediate risk-free profit.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #26 on: March 31, 2014, 07:57:56 PM »
I have been hearing about high frequency trading for a long time, but didn't really understand what they were doing for quite a while.  A few years ago I read an explanation of how the programs detect large orders and front-run these large orders.  More recently I read a book called "Dark Pools" by Scott Patterson which covers a lot of the same ground as Michael Lewis' new book.  I love Michael Lewis as an author and can't wait to read his book.  I think these guys (HFTs) can trade in fractions of a penny, so if a large portfolio has a resting order to buy 100,000 MSFT at 39.25,  even if the price comes down to that level, after 100 or so shares trade at 39.25 and the HFT detects a huge bid there, he can buy shares at 39.251 and try to sell them at 39.26.

I understand that many portfolios make large buy/sell decisions and then go to the market to execute the trades, undisguised, but I don't understand why a hedge fund trader wouldn't do more spoofing to try to outfox the HFT, for example by flashing a large bid and then putting an offer one cent higher.   The HFT thinks there is a buyer in the market, so buys your shares, when you are actually a seller.  This is how I was taught to trade (institutionally).  If you want to sell something, the first thing you must do is show a bid, which tells the market there is buying interest.  We also would routinely front run customers.  It was a matter of self preservation.  If a customer showed himself to be a large buyer, I would have to go to the market and buy buy buy. 

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #27 on: March 31, 2014, 08:09:45 PM »
  Here is another trick of HFT.  If person/entity A sells a stock and person/entiy B buys that stock if there is a difference in our big/offer prices and limit/market orders the results are:

1.  Bid and Ask prices do not match/cross, no transaction.
2.  If market sell order and limit buy order then, B saves some money on buy getting stock at cheaper price.
3.  If limit sell order and market buy order then, A gets some money selling stock at higher price.

With HFT I can middle man the deal and money that would normally go to either the seller or the buyer I pocket because I have access to both sets of data before it is matched in the stock exchange.  Milliseconds count.


warfreak2

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #28 on: April 01, 2014, 07:22:16 AM »
I think auctions only make sense for illiquid markets or non-fungible goods. In a liquid market for fungible goods (like stocks), the winning bid (if the auction is selling something) should never be lower than the spot price. If it were, there would be an arbitrage opportunity -- someone could bid somewhere between the current winning bid and the spot price right before the close, then turn around and sell it on the spot market for immediate risk-free profit.
There is no "right before the close", because every bid extends the auction long enough for other bidders to react to it. However, what you describe is a feature - the price at the end of the auction is the same as the spot price. The main advantage is that auctions don't create race conditions, and that's beneficial in markets for any goods, liquid or illiquid, fungible or non-fungible.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #29 on: April 01, 2014, 07:50:23 AM »
As already mentioned, in the long term, HFT won't affect much. Now, it might mean you buy a stock for a slightly inflated price and sell at a slightly deflated price. But if you're talking about holding stocks for a long period of time, this will probably be so small it will be within the rounding error of your percentage calculation. My understanding is HFT is arbitrage with cents of fractions of cents. I don't see that being a big deal.

Also as already mentioned, the protection is to be careful with your stop-losses and avoid market orders for short-term trading. Market orders probably won't affect you much if you're a buy-and-hold investor.

Bottom line - keep doing what everyone on this forum has already advised: dollar-cost-average index funds over time and FIRE.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #30 on: April 01, 2014, 01:13:54 PM »
More recently I read a book called "Dark Pools" by Scott Patterson which covers a lot of the same ground as Michael Lewis' new book.  I love Michael Lewis as an author and can't wait to read his book.

And there we have it.  Now if these guys had written rather dull tomes on how the market works, how many copies do you think they'd sell?  Not many, right?  But allege that there's some horrible elitist conspiracy to rip off ordinary folks, and watch them fly off the shelves :-)

AlanStache

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #31 on: April 01, 2014, 04:10:01 PM »
Quote
As already mentioned, in the long term, HFT won't affect much. Now, it might mean you buy a stock for a slightly inflated price and sell at a slightly deflated price. But if you're talking about holding stocks for a long period of time, this will probably be so small it will be within the rounding error of your percentage calculation. My understanding is HFT is arbitrage with cents of fractions of cents. I don't see that being a big deal.

So it is your position that sometime between the buy and sell of a buy/hold investor that fundamentals take over from HFT manipulation and the market comes to (or rather stays at) the "correct" fundamental/efficient market price?  You dont think the micro-pennies per everyone's translation adding up to billions for the hft add up to a different market price over 10 years?  I have seen in engineering where 0.001+0.001+... can be ignored but also I have seen where 0.001+0.001+... can add up to something really big.  All depends on the system dynamics.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #32 on: April 01, 2014, 04:46:19 PM »
Business Week pointed out an aspect of the market I've never heard of:  wholesalers.  Apparently us little retail investors end up doing most of our trading with the wholesalers, so our orders never get out to the public exchanges:
http://www.businessweek.com/printer/articles/192213-what-michael-lewis-gets-wrong-about-high-frequency-trading

In other words the HFTs are just smacking the crap out of each other, a visual image which appeals to my sense of financial karma.

So I'm willing to change my opinion and view HFT as (at best) an innocuous nuisance, no worse than other tactics which skirt the legal limits of the law.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #33 on: April 03, 2014, 07:09:51 AM »
A lot of attention , opinions are coming up daily regarding this issue also Amazon's No. 1 best seller (four days in a row): Michael Lewis's Flash Boys.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #34 on: April 03, 2014, 09:20:04 AM »
Like everyone said, this shouldn't really affect value investors or people like me that mostly use index funds.   However, this is still a bad thing for a lot of people's retirements.    Think of all the teacher pensions that are managed by people that don't have access to the best HFT.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #35 on: April 03, 2014, 09:22:55 AM »
Like everyone said, this shouldn't really affect value investors or people like me that mostly use index funds.   However, this is still a bad thing for a lot of people's retirements.    Think of all the teacher pensions that are managed by people that don't have access to the best HFT.

Why are those pensions trading that quickly?  I'd be very upset if any pension manager in charge of a pension I was a member of saw any sort of effect from HFT.  A pension should be a long term buy and hold with stable (blue chip) assets, for the most part.

I'm no fan of HFT, I think it should be taxed to where it doesn't happen.  But I don't see why people are hand-wringing so much about it.  Then again, people hand-wring over pretty much any scare tactics in the news.  This is just one that hits at Mustachians, whereas something like "you won't ever be able to retire" probably doesn't.
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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #36 on: April 03, 2014, 10:35:57 AM »
I think what disturbs me most about HFT is that it is clearly built not to invest or divest in companies, but to make enormous sums from manipulating computer generated supply and demand. It puts the entire system at peril and for no good reason. While it does not affect me, personally, in the here and now, I am more concerned for the integrity of the stock market as a whole.

Recall how the housing boom and bust was triggered in part by the titans of Wall Street simply manipulating numbers without solid fundamentals being in place. The parallel isn't exact, but the concept is the same. HFT is a perversion of what the stock market was designed to do just as speculation and unjustified lending was a perversion of the real estate market, and HFT has ballooned to the point where the vast majority of all trades are now HFT.

I think that is reason to give us all some pause.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #37 on: April 03, 2014, 07:11:31 PM »
  I agree with Hybrid.  HFT has the potential to crash not just a single stock but the entire market.  One typo error in an HFT server...shutter.  I oppose HFT cause introduces many risk to the stock market with no upside.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #38 on: April 03, 2014, 09:22:22 PM »
Index funds have to rebalance and deal with a lot of stocks in very large volumes.  I would be very worried as an index investor.  The index fund turnover premium was already 20-30bp annual before the prevalence of HFT.

« Last Edit: April 03, 2014, 09:27:28 PM by Otsog »

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #39 on: April 03, 2014, 09:48:58 PM »
  I agree with Hybrid.  HFT has the potential to crash not just a single stock but the entire market.  One typo error in an HFT server...shutter.  I oppose HFT cause introduces many risk to the stock market with no upside.

We've seen the flash crash problem.  It isn't one.  The market corrected almost immediately.

If you think it's actually a problem, set some triggers to purchase a lot if the market falls 50% in a few minutes and take advantage of this "problem."  :)
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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #40 on: April 03, 2014, 09:58:43 PM »
We haven't seen the flash crash x 10 problem.  That's what people are worried about.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #41 on: April 03, 2014, 10:50:57 PM »
We haven't seen the flash crash x 10 problem.  That's what people are worried about.

And what do you think will happen then?

I'd be going WHEEE.  (Actually I'd more likely be going "aww damn I missed it" since I don't check the markets and would only hear about it a bit later, after the market jumped back up.)

You think it'll crash to .. 0?  And then stay there, because people will go "welp, guess everything's worthless now"?

Or do you think OTHER HFT bots and (asp) humans will jump on it?

I'm genuinely curious how you think a "flash crash x 10" problem will go, and what it will look like after an hour, a day, a week, a month.
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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #42 on: April 03, 2014, 11:36:26 PM »
I don't know and personally I don't want to find out. What makes you think it would stay contained in the equity markets?  A nightmare scenario would be sustained volatility shocks to the point where liquidity concerns spread to other markets.

It that impossible? Is that a Black Swan event?  It would be comforting if anyone on Wall Street could speak intelligently on it. 

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #43 on: April 04, 2014, 06:02:10 AM »
Quote
If you think it's actually a problem, set some triggers to purchase a lot if the market falls 50% in a few minutes and take advantage of this "problem."  :)

I have put a little time into this, not just for flash crashes but for other sudden events with probable quick recoveries but decided it was not worth sitting on that much cash waiting for one event every bunch of months.  Also could be tricky managing the money automatically if multiple triggers were hit at the same time or the market became illiquid you could miss it all.  And you would need an automated trading platform and those can run 100$/month at the low end.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #44 on: April 04, 2014, 06:13:25 AM »
Harvards business Review on the matter.

http://blogs.hbr.org/2014/04/high-frequency-trading-threat-or-menace/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+harvardbusiness+%28HBR.org%29&cm_ite=DailyAlert-040414+%281%29&cm_lm=sp%3Aekass73388%40aol.com&cm_ven=Spop-Email



Separate from the article above,


Lewis's book should be considered a start on the road to building an understanding of, and having a national discourse about, HFT.

That should naturally lead to other associated questions about offshore proprietary trading funds, shadow banking and the relationship of banks to it, why there are $300 billion in Caribbean banks, who owns that money and what do they do with it, is this money being funneled without regulatory oversight through shell companies into HFT operations to be used to lever and manipulate equity futures, create and buy dips, force shorts to cover, and control the markets overall?

These are not conspiracy theories, nor are they illogical or irrational questions.

Many knowledgeable people have been considering such for the past several years as HFT has come to dominate trading volume and money has piled up in the Caribbean banks, now the 4th largest holders of US Treasuries behind China, Japan, and Belgium (European Union).

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/...

The money in those banks is largely foreign profits of US corporations parked there to avoid repatriation taxes.

But it is illogical to think that these same companies and their bankers are simply letting the capital sit in US Treasuries offshore to avoid taxes.

Many who've considered these issues have resigned themselves to believing that the financial sector will never allow these questions to be asked let alone answered.

Maybe Lewis's book will mark the beginning of the process of changing that. I hope it does anyway.
« Last Edit: April 04, 2014, 06:40:17 AM by soccerluvof4 »

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #45 on: April 04, 2014, 06:32:35 AM »
I don't know and personally I don't want to find out. What makes you think it would stay contained in the equity markets?  A nightmare scenario would be sustained volatility shocks to the point where liquidity concerns spread to other markets.

It that impossible? Is that a Black Swan event?  It would be comforting if anyone on Wall Street could speak intelligently on it.

It would be contained in equity markets because of various actions the SEC take when they start seeing unusual activity. The action is called a circuit breaker.

Will we get to a time where we have a piece of software which will not be able to be controlled by things like a circuit breaker? Yes. Are we there now? I don't think so.

Any sort of flash event will be contained to a relatively small time frame, hence the term flash. The ability for a flash event to spread out to other markets is small at this time given the current measures in place. That's just my take. Do I think it should continue? No it should be taxed to make it go away. But that is more due to a gaming of the system and creating an imbalance that doesn't need to be there, not because of any risk to the common investor of massive market crashes. The market has done that just fine on its own on several occasions. :)

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #46 on: April 04, 2014, 08:02:10 AM »
I don't know and personally I don't want to find out. What makes you think it would stay contained in the equity markets?  A nightmare scenario would be sustained volatility shocks to the point where liquidity concerns spread to other markets.

It that impossible? Is that a Black Swan event?  It would be comforting if anyone on Wall Street could speak intelligently on it.

So you're concerned about something that has been weathered fine in the past on a smaller (one might say "test") scale, you have no idea what it would look like, and no idea how it would affect anything?

I feel like your hands must hurt from all the wringing.  ;)

I wouldn't stress about it.

I think HCF is bullshit, and should be shut down.  But it's sure not something I worry about crashing the world economy and sending us into a doomsday tailspin back to the middle ages.  ;)
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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #47 on: April 04, 2014, 08:16:28 AM »
Quote
Index funds have to rebalance and deal with a lot of stocks in very large volumes.  I would be very worried as an index investor.  The index fund turnover premium was already 20-30bp annual before the prevalence of HFT.

<===THIS


Large funds,  ESPECIALLY index funds,  are the biggest targets and victims of this type of high frequency trading.  Why?  Because they MUST buy a large quantity of stock, and the truth is they are not terribly price sensitive.  If they need a position for their index, they have to buy it at market, or as often is required, at the closing price.  They don't have the luxury of saying, "I like GOOG at 575.50 and not a penny more."    They need to buy 10,000 GOOG and see it offered at 575.50 but when they enter an order to buy 10,000 at 575.50 they get 100 and the price starts moving higher. 

I don't see how this type of HFT  (front running large orders) affects the average individual investor buying individual stocks.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #48 on: April 04, 2014, 08:46:08 AM »
Like everyone said, this shouldn't really affect value investors or people like me that mostly use index funds.   However, this is still a bad thing for a lot of people's retirements.    Think of all the teacher pensions that are managed by people that don't have access to the best HFT.

Why are those pensions trading that quickly?  I'd be very upset if any pension manager in charge of a pension I was a member of saw any sort of effect from HFT.  A pension should be a long term buy and hold with stable (blue chip) assets, for the most part.

I'm no fan of HFT, I think it should be taxed to where it doesn't happen.  But I don't see why people are hand-wringing so much about it.  Then again, people hand-wring over pretty much any scare tactics in the news.  This is just one that hits at Mustachians, whereas something like "you won't ever be able to retire" probably doesn't.

A lot of pension funds have been decimated by companies that looked like blue chip investments.   I remember the Ohio teachers fund took a big hit when Enron folded.   How many funds had lots of cash in former orphan and widow companies like GM in 2008?   

You might be right and the ability to have money in the market at lots of different points should let a pension fund ride the waves.    On the same token though, if individuals aren't allowed to receive the same high highs that HFTs can get in a bull market, they're taking a much bigger hit to their portfolio in a bear market.

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Re: Stock Market Rigged for Average investors!! 60 minutes
« Reply #49 on: April 04, 2014, 09:04:07 AM »
I don't know and personally I don't want to find out. What makes you think it would stay contained in the equity markets?  A nightmare scenario would be sustained volatility shocks to the point where liquidity concerns spread to other markets.

It that impossible? Is that a Black Swan event?  It would be comforting if anyone on Wall Street could speak intelligently on it.

So you're concerned about something that has been weathered fine in the past on a smaller (one might say "test") scale, you have no idea what it would look like, and no idea how it would affect anything?

I feel like your hands must hurt from all the wringing.  ;)

I wouldn't stress about it.

I think HCF is bullshit, and should be shut down.  But it's sure not something I worry about crashing the world economy and sending us into a doomsday tailspin back to the middle ages.  ;)

Haha my hands are doing ok.  I shouldn't have even of speculated on something I have no ability to analyze. 

I think you are right.  When I said 'people' are worried about flash crash x 10, it was Michael Lewis saying that was a direct quote from the heads of Goldman Sachs' equity department.  I thought if those guys, who have far more insight into the system than I do, were worried, what are the risks to the system?  But, I see now a Wall Street senior manager should be worried about flash crashes of any magnitude coming from their shop because of the risk to their firm's cash flows and not risks to the system as a whole.  As the originator of a flash crash it would be easy for other market participants to avoid your exchange/brokers/dark pool completely with all the competition out there now, and the market would be just fine.

I lost myself for a bit there and thought the incentives of myself and Wall Street were aligned, HA!

I'll just say I'm disconcerted that those running the show are as clueless as they are.

 

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