Tell HN: Stocks are not a zero sum game and high frequency trading is great

Isn't "finding undervalued companies" fundamentally an infrequent activity? I don't see how it's possible to assess the value of a company relative to market price fast enough to make even 10 trades a day.

I would say High Frequency Trading is, by definition, not about value, but about price only.

Isn't "finding undervalued companies" fundamentally an infrequent activity

I guess I don't understand why this is necessarily true. ACN supposedly might have traded $.01 on the day of the flash crash (busted). It rallied back after the fact. It was likely undervalued at $.01. If such price behavior were to be an annual, monthly, daily, or hourly occurence, it'd probably still be considered a mispricing of the stock. My position is that "correct" valuation (if such a thing exists) and frequency are entirely independent.

I don't see how it's possible to assess the value of a company relative to market price fast enough to make even 10 trades a day.

i think you're making a comment about the speed at which valuation occurs. without sounding too obvious about the answer, computers are really fast at running numbers (not trying to be rude). there are all sorts of ways of valuing companies, even in the traditional space of "value investing". http://www.fool.com/investing/beginning/how-to-value-stocks-... gives 5 broad methods to start. if there were a method that involved only objective numerical data, then that valuation could occur continuously throughout the day.

I would say High Frequency Trading is, by definition, not about value, but about price only.

I think the 2 are necessarily related. When Value = Market Price, the issue is fairly/correctly priced. When the two diverge, there is an opportunity. High frequency trading is concerned with finding issues that are underpriced with respect to the "true value". So in that sense, I think High Frequency Trading is certainly about price, as is "long term value investing".

[Collecting rebates and high frequency trading don't so much apply to the claim i'm making here]

oh, and btw. sproutrobot is awesome.

No, I wouldn't say pricing is fundamentally an infrequent activity, although analyzing the "idiosyncratic risk" may well be. That's not all that's going on though. For example, investors in, say AAPL, do not live in a Plato's cave where nothing else but Steve Jobs' latest keynote matters (believe it or not!). There's the rest of the market to consider.

In fact, a lot of algorithmic trading is about quickly assessing the value of a company in the context of a larger portfolio. If you accept that the market index can (and should) fluctuate second by second as the world tuns and news gets reported, then you must accept that companies' stocks will be traded alongside it (usually in rough proportion to the amount of liquidity available).

Here's how that can work. If you're comparing two stocks that share fundmental drivers, then you can make "pair trades" when they fall out of correlation. If Pepsi (PEP) does really well one day and CocaCola (KO) does terribly for no apparent reason, then it may be a good trade to buy KO and sell PEP on the supposition that the stocks have moved out of equilibrium.

This is basic arbitrage, and if you extend the practice across all the traded securities you'll find you need some pretty serious computing power. I suspect this accounts for much of the silicon in the basements of banks and hedge funds.

Notice that I'm just talking about the pricing function here. You can price a stock all day long and not have to trade on it.

And I'll agree that there's way too much volume, churn, and speculation in the market. I'm not sure, but I feel like it's becoming more and more a behavioral system. I wish people and institutions would better understand long-term risk and the costs of commissions and slippage when making investments. If "managed" funds became a dirty word, there may be a lot less volatility in the market.

> [Most] High frequency trading and "investing" are basically the same thing on different timescales.

Yes, it's basically the same if you take out all the differences. Nothing said so far.

Also, investing is clearly not the only activity on markets (speculation, arbitrage, you name it), so let's not over simplify things.

Interesting reflection field, though.

HFT is not the same as long term investing. Being able to see orders before they happen makes it fundamentally different.

flash orders is actually the main thing i was referring to when i said "There are flavors of HFT that aren't easily defensible "

a whole lot of HFT has nothing to do with seeing the orders before they happen.

"high frequency trading" encompasses a lot of different strategies (just like "computers" is a large and varied field).

imagine a high frequency strategy that finds mispriced securities, and trades them. as it happens, these trades tend to converge very quickly. would you consider this "fundamentally different" from long term investing (in any way other than the holding time horizon, which the agent can't possibly know before the trade actually realizes)?

Yes, I would. The definition of "mispriced", I would argue, is quite different. You could come up with all sorts of algorithms to trade in the midst of a bubble, and find "undervalued" companies on micro time scales. In the value investor's mind, the same companies are always overvalued. Value is relative in one case and absolute in the other.

Splitting hairs perhaps, but the fundamental approaches are different. I will give you that the hf mentality can certainly be applied over long time periods.

define: mispriced = "value != market price"

Where you and i diverge is "Value is relative in one case and absolute in the other."

I think you're saying that HF Guy's definition of value is relative and Value Guy's definition of value is absolute.

If its even correct that any company has a single true value, I think this number is unknowable. Investors or traders make estimates of this value, and if their estimate deviates significantly from the market price, they transact with Mr. Market.

Nobody's estimate is more absolute or relative than any one else's.

edit: deleted a bunch of pointless words.

Who said it was a zero sum game?