Comment by blazespin | Hacker News Reader

Comment by blazespin | Hacker News Reader

They're saying that low latency / lack of fundamentals (versus 'market events') marks HFT.

Unfortunately, at the end of the day, even if you are only about 'fundamentals' (whatever that means) you're obviously going to want to trade FIRST on those fundamentals .. right? Cause whoever does is going to win the day. Ok, so low latency is necessary for normal electronic trading.

Ok, now market events versus fundamentals. Seriously? At what point are 'market events' not fundamentals? The definition is all arbitrary. If there is a change in some correlating index, isn't that a 'market event'? But isn't it also rather fundamental (say, that correlating index is interest rates futures)? At what point does that change in the correlating index no long qualify as a 'fundamental event'? When Nanex says it doesn't?

Nanex simply wants to have its cake and doesn't want to be marked as "HFT". All electronic trading, at its heart, is going to be HFT at some point. The only way to keep that from happening is just come up with really arbitrary definitions marking the line you can't cross. Likely those definitions will be used to help whoever is paying Hillary Clinton/Bush/Trump/etc the most money.

Let's not bother with these shenanigans just put a transactional tax on everything and be done with it. Let's stop spending all our time and our brain power creating software to do trading and start getting back to actually researching /innovating / building things.

the problem with transaction taxes is, if they are high, they reduce trading and liquidity. When you go to buy and sell stocks, or futures or govt bonds, what do you think is the process that keeps the difference between bid ( buy ) price and ask ( sell price ) relatively narrow ? it's the frequent trading process that does it

Does anyone know if regulations on minimum terms for holding period for stock ever been used/considered in modern markets? (eg. day/week/month?) I realize that it'd effect liquidity in a similar way to transactional taxes (portion of portfolio tied up in term at any given point) but could it also reduce volatility and ensure trading against long term value rather than short term artifacts?

no, it would increase volatility. People think that volatility increases with trading. In fact, volatility can be very high without trading. Because the prices at which people can trade will fluctuate even more if you make it harder to trade

I understand we can speculate that volatility could increase due to lower trading volumes, but the lower volumes aren't the only factor to take into account in this scenario.

right, well, think of it this way. Trading process is the process of price discovery. Most recent traded price is the current price for the asset, assuming it's trading frequently. An infrequently traded asset creates more uncertainty about what is its actual current market price. And volatility is a function of uncertainty.

> you're obviously going to want to trade FIRST on those fundamentals .. right? Cause whoever does is going to win the day

If you're only trading long term, then sub-second differences are essentially irrelevant.

I think there's a perfectly reasonable point here. Fundamentals as "trading against the future profit of the company". HFT as "trading against the system".

Absolutely! Which is why a transactional / tobin tax wouldn't hurt such folks as they will be trading infrequently. https://en.wikipedia.org/wiki/European_Union_financial_trans...

And it's funny, New York already has such a law on the books:

http://www.thenation.com/article/why-cuomo-leaving-wall-stre...

The tax is instantly rebated since 1981 (thanks, Reagan-era politicians!), so no money around this tax ever changes hands. It seems like it could be an interesting place to start looking as a model for a federal-level tax on financial trading.

Yeah, but I'm not naive enough to think this will get passed soon. The problem with the US is that its manufacturing base has been so hollowed out it has become reliant on its treasury bonds + QE money printing fed (backed by its military) and financial hegemony (think Goldman Sachs) that results from it. The ftt got passed in the EU because Germany (which runs the EU, mostly) actually still makes things. They don't need the world to transact their bonds in order to stay liquid.

I was curious about this conjecture that the US doesn't make things, while Germany does. So I dug up [0], a table of "Manufacturing, value added (current US$)", and here are the top five countries for 2013:

1: China $2.9bn, 2: United States $1.9bn, 3: Japan $904m, 4: Germany $745m, 5: Korea $368m

Manufacturing in Germany may contribute a higher percentage of GDP, but it does not appear to have a larger (in dollars, according to this data) manufacturing base than the US in absolute terms.

[0]: http://data.worldbank.org/indicator/NV.IND.MANF.CD?order=wba...

It would be hard to expect Germany to produce more in absolute terms, with Germany's population being 25 % of US population (US=320M, Germany=80M).

With its population 4x higher, the US only produces 2.5x more stuff.

That's a huge difference.

It's a huge difference but it isn't particularly telling about any larger points.

A large component of US output is agricultural or natural resources which are not included in that number (nor is software for that matter).

To the extent transactional taxes retard market-making and drive spreads back towards where they were in the 1980s, those taxes do in fact harm retail investors.

Sweden tried it and had to go back on this due to liquidity drying up. By the way, we already have transaction taxes in the US. That's how we fund the SEC and CFTC. Every sale of stock is charged an SEC fee. The issue is, if you set these fees too high, then you will in fact harm investors by reducing liquidity.

Sweden's fee was probably a bit high. They also were too small to implement it and didn't discourage the use of foreign brokers enough.

Unless you're trading way more frequently than you need to be, the spread is hardly a big deal. If you are trading frequently, than the spread is an opportunity to make money. As someone who trades a lot, I like fat spreads.

My advice to any retail investor though is just dollar cost average into an index fund as a function of your age and forget about it. If you are going to try to 'beat the market' (and worry bout things like transaction taxes and spreads) you will lose.

When people talk about retail traders in this conversation, they are either totally clueless or working in the industry and just don't want to be taxed.

Anyone who says a retail trader should be trading enough to worry about spreads is not your friend.

"Retail trading" here being a term capturing all trading done on behalf of normal people, including pension and mutual funds.

So no, that argument very much does not carry.

High frequency traders front run the dumb money, err, pensions. Getting rid of HFT via a transaction tax will not hurt them. Also, pensions shouldn't be trading so much that these things will hurt them. As for mutual funds, again, you're better off with an index fund and just not looking at it until you retire.

How anyone outside the industry can argue against a transaction tax is beyond me. You have no idea how much the market has been rigged to suck as much money as possible out of you. Wall Street does not generate wealth. Everything they make is a tax on those that do.

If that's true, why doesn't Vanguard agree with you? They've said publicly more than once that they are benefiting from HFT activity.

I'm a little concerned that we're not talking about the same thing, by the way. Should retail traders care about modern spreads? No. Modern spreads are tiny. But before electronic trading pushed out the crooked human market makers, they were not.

They have 3.5 trillion in client funds invested. They'd be insane to say the market is rigged.

edit to add: Thinking more about it, likely their more profitable accounts (ie, not their index funds) would be destroyed by a transaction tax and so they don't want to see it implemented. The salad days of just doing a simple honest index fund with 3% annual turnover are long over for Vanguard.

But people who trade against fundamentals aren't trading directly against future profits, they are just betting on long term price movements. HFT traders are betting on (very) short term price movements.

According to the theory that stock prices are a martingale (which is well established), there is no qualitative difference between long and short run price movements. In particular, there is no reversion to the mean in stock prices [0].

[0] Of course, there are going to be literally hundreds of papers exhibiting some reversion to the mean effect. But this effect is always tiny.

yeah, in fact any long term movement is mathematically a sum of short term movements :) so if your goal is to predict a long term movement, there is really no contradiction between using both long term and short term predictions to trade

Yes, but being a martingale implies something stronger, which is that both short and long term traders are betting on the fundamentals to exactly the same extent.

"In particular, there is no reversion to the mean... there are going to be literally hundreds of papers exhibiting some reversion to the mean effect."

Okay.

I also think you don't know what a martingale is. It is impossible to make any expected value betting on martingale movements, by definition. If you believe traders are purely "betting on price movements" of martingales then profit is impossible. So either prices aren't martingales or trading is not purely a process of betting on the movements of market-clearing prices. Actually, both assumptions are false.

If you knew anything about academia, or if you even bothered to carefully read my post instead of nitpicking, you would understand that just because something is in general true, doesn't mean that there won't be hundreds of papers showing how this thing fails to be true in special cases, or to a very small extent.

Regarding martingales, a martingale is defined relative to an information set (you know what a martingale is so you already knew that, right?). Saying that there is no reversion to the mean implies being a martingale with respect to the weakest possible information set (the history of prices). Traders, whether high frequency or others, may have extra information outside this information set.

In short, stop nitpicking and revise your understanding of what a martingale is.

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