Posted on 07/11/2009 4:09:33 AM PDT by TigerLikesRooster
Rogue Algorithms And Other Mutually Assured Destruction Program Trading Alternatives
Posted by Tyler Durden at 12:54 PM Submitted By Joe Saluzzi Of Themis Trading
Why Institutional Investors Should Be Concerned About High Frequency Traders
By Sal L. Arnuk and Joseph Saluzzi
A Themis Trading LLC Mini White Paper
It is now generally understood that high frequency traders (HFTs) are dominating the equity market, generating as much as 70% of the volume.
HFTs are computerized trading programs that make money two ways, in general. They offer bids in such a way so as to make tiny amounts of money from per share liquidity rebates provided by the exchanges. Or they make tiny per share long or short profits. While this might sound like small change, HFTs collectively execute billions of shares a day, making it an extremely profitable business.
Why should institutional or retail investors care? After all, aren’t HFTs adding liquidity? That’s what they and the exchanges, who court their business, say.
1. HFTs provide low quality liquidity.
2. HFT volume can generate false trading signals.
3. HFT computer servers are faster than other trading systems.
1. What if a regulation like the uptick rule were enacted?
2. What if a “rogue” algorithm entered the market?
(Excerpt) Read more at zerohedge.blogspot.com ...
Ping!
bttt
Interesting and interesting comments at the source. Thanks for posting.
Perhaps we should go back to trading in eighths to discourage these program traders.
In my time as a professional trader, I have never encountered "high quality liquidity." All liquidity is low quality. It is only offered so long as the environment is safe.
bttt
http://www.safehaven.com/article-13892.htm
but he is as well writing about Japan:
Japan's population is shrinking, and the number of workers per retiree is rising. Japan has the highest ratio of debt to GDP in the developed world. And that debt is growing by 7-8% a year, and does not include local debt. Interest rates cannot go lower. Savings are falling rapidly and will not be able to cover the need for new debt issuance, by a long shot. Within a few years, because of the aging of the population, savings will go negative. Social security payments are rising. GDP is shrinking, and export trade is off about 30-40%, depending on the industry. Machine tools are down 80%!
If rates were to go up by 1%, let alone 2%, over time Japan's percentage of tax revenue dedicated to interest payments would double to 18% and then to 40% and then just keep going up. It is conceivable that it will take 100% of tax revenues in less than ten years, at the current trajectory. Why? Because Japan is going to have to start to compete with the rest of the world to sell its bonds. Who but the Japanese would buy a Japanese bond at 1.3%? From a country that is rapidly going to 200% of debt-to-GDP? Doesn't really seem like a smart trade to me. And as the data shows, the ability of the Japanese consumer to buy more debt is rapidly waning.
The Japanese government is coming to a crossroads with no good exits. Cut the budget drastically in the face of a deflationary recession? Monetize the debt and let the yen go the way of all fiat currencies? Can someone say Zimbabwe? Increase already high taxes in a very weak economy?
I leave you with one brief excerpt. The editing is mine:
Now you can see why Goldman Sachs has its panties all in a bind about their little ol’ computer program… That is what investing has boiled down to these days – who can get their order in front of the next guy and get it to the exchange the fastest.As a long time speculator I used to be proud of my profession but I must say that this new breed of fund managers and their quant boxes disgust me because it feeds into the notion that we are nothing but a bunch of low-life parasites who produce nothing useful. At least we once did a lot of analysis and provided liquidity and served as a conduit for commercials looking to offload risk.
We have now been reduced to a bunch of leeches sucking money out of the hands of those who actually still believe that the markets serve as a price discovery mechanism. Trading/Investing has morphed into a hopped up video game on steroids.
Why oh why does government sachs join the chorus line for the dollar to fail?
http://bluelori.blogspot.com/2009/07/in-our-hands-anti-fascist-film-from.html
“You sound an awful lot like a shrill from the NYSE. Apparently you are not aware that there is no longer a buyer of last resort in the market, just clever robots who do not need to provide any actual liquidity. And yes, that is a bad thing.”
Interesting the banter between these traders.
I saw that the day it came out. Gore is so stupid he spills the beans. I’m sure he was castigated afterwards.
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