Hacker News Reader

Comment by rwissmann | Hacker News Reader

HFTs are not any more a tax on stock transactions than previous market makers. In many settings they actually do lower transaction costs. Just ask other market participants such as L/S hedge funds, systematic traders, mutual funds etc. In particular, HFTs drove many of the old school manual market makers out of business, or at the very least reduced their margins significantly.

The non-populist argument these days seems to be less about fast, electronic market making and more about whether there should be a fixed, minimum trading time, e.g. by discretizing trading into intervals of a certain length.

View on HN

Any stock trade where the buy vs. sell of a stock is under 3 months is not investment.. In under a day, even more so. It will not be felt by the company in question in any meaningful way, and is simply a newer form of gambling. By taxing any income made from trades where ownership is less than a month at 100% we can create a more honest trading environment, where sane investment becomes a norm.

The fact is that would never happen. I'm all for investment.. hell, I'm all for gambling, sex, drugs and rock and roll for that matter. I don't think most things should be illegal... but labeling the stock trade and wall street as investment companies is ludicrous.

For a sensible and mature owner-manager partnership to flourish, investor holding periods need to be aligned with business planning horizons. Many significant projects need between 6 months and 5 years to come to maturity, and holding periods should reflect this pattern (according to the needs and nature of the business).

I would argue that investors with a 3 month holding period are actually exerting a pretty corrosive influence on businesses: emphasising a focus on the next quarter's results at all costs.

A company isn't affected by who holds the stock. If I decide that I don't want to hold a stock in a company building a bridge across a river, and sell it to Jack, why does that change the company's desire to finish the bridge?

Because if Jack does't want to build the bridge and he holds enough of the company then he gets to say "stop building the bridge."

Is there evidence that's actually what's happening? I hear a lot of complaints on the internet about a quarterly results focus, but I've never heard of shareholders actually telling a company to change tack.

There are anecdotal evidence of this regularly happening, but usually those are fair decisions: both strategies discussed are generally sound, if radically opposed. One is generally a cash-out option and is favored by influential raiders who want the cash flow to invest elsewhere; the other is a growth option that might be more about serving management’s ambition that the stakeholders' interest. But those debate are public, rare and not entirely nefast.

What I have seen far more often is smart decisions delayed to please the investors, or costly decisions taken, at all stages: before or during Series A, B or further, before or during an IPO, etc. The most common ones are related to HR: contractors costing double and won't be here when what the set up breaks rather than employees to set-up a strategic asset because, otherwise, accounting practices would show increasing long-term duties to said employees. More generally, many companies suffer from a lack of investment because of the short-term focus — this I can describe in details in repeated cases, for the dozen of more companies that I’ve worked with. The single exception was when investors used the product themselves and behaved more like end-users.

Every time a CEO gets fired by the board of directors that's the shareholders telling the company to change tack.

http://en.wikipedia.org/wiki/Carl_Icahn

Over the past two or three decades it has become increasingly common for large and institutional investors to regularly hold meetings with the senior leadership (and investor relations) teams of the companies with which they have (or are looking to have) significant holdings.

After all, the investor needs to understand the business strategy, the operating conditions, and the particular risks and opportunities available to that business. The company and (particularly) it's management have an interest in increasing demand for the stock, so they normally oblige.

The conversation is not one-way. Stock options mean that the personal financial interests of the senior leadership team are normally well-aligned with that of the investors, so all the parties to these discussions have a mutual interest in the performance of the stock.

Investors have a mandate to maximise return and minimise risk. They have a limited ability to predict the future; an ability which drops precipitously the longer into the future they look. Investing client funds based on unreliable long-term predictions would be an irresponsible dereliction of duty on the part of the fund manager. In addition, measuring the performance of fund managers is also notoriously difficult, so there is a very human need to get as much feedback on performance as possible as quickly as possible. All of these factors combine to exert incredible pressure on the institutional investor to focus on gains in price over shorter time-spans (months rather than years).

This interest and short-term focus will naturally come across in discussions between the investor (=owner) and the senior management in the company. It takes an unusually self-aware, self-confident and self-assured management team to recognize (let alone resist) this inexorable pressure.

It's not investment, but it may be legitimate market making. If the only people in the market are investors, it is significantly harder for me to liquidate my stock when I need to and significantly harder for me to buy stock when I want to.

Not really. If there aren't investors willing to buy your stock within a few minutes, there won't be any HFTs willing to buy either. HFTs just bridge that gap in time, for a fee.

You said 3 months. Bridging gaps in time is useful and worth a fee, even at amounts of time significantly shorter than 3 months. I made no claim about all HFT being this, I complained about the metric you were using.

It's not an investment, but it doesn't have to be an investment to be useful!

Instead of making money by choosing stocks, market makers make money by providing a concrete service to the market: they make it easier to buy and sell for people who are investing. They are more like the merchants or shipping companies of finance, rather than speculators. And there is nothing wrong with this!

In fact, calling it gambling is just wrong: most market makers actually take on very little risk! While their actions are not felt by the company directly, they are felt by people who own the stock and people who either want to buy or sell it. And knowing that it's easy to buy or sell a stock makes people more likely to participate in the markets, which is definitely a good thing.

Also, it's very important to note that even non-trivial investment strategies do not involve buying and holding on to large blobs of stock for months. Instead, you likely want to micro-manage your portfolio following some sort of mathematical model every day to minimize risk and exposure. Again, there is nothing wrong with this! But it does involve quite a bit of buying and selling stock, and the liquidity created by market makers really helps.

Viewing the stock market as solely a means to invest for long periods of time is really missing most of the picture. Your suggestion would actually increase most people's risk, leading to more gambling rather than less--or just significantly less investment over all!

Reply on news.ycombinator.com