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Japan (lightly) regulates high-frequency algorithmic trading

It's a start.

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Re: No its a kind of Lefty / Commie plot...

If they just charged money to cancel orders they'd fix 90% of the issues, because that takes away the power of program trading to try to 'entice' other programs to stumble and make bad trades.

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Anonymous Coward

It's a start.

Which has a very long way to go and needs to go too.

In theory, HFT is sucking money out of thin air without matching economic activity. In practice, there is no such thing as sucking money out of thin air. There is a finite amount of money which circulates in a "connected vessels" system. So any money invested into HFT is money which is money which is withdrawn from investment into "legacy" investment activities - long term purchase of stocks and bonds - something that drives the rest of the economy, not just the cocaine habit of wolves of wall street.

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So any money invested into HFT is money which is money which is withdrawn from investment into "legacy" investment activities

Well most equity markets are now "legacy investment", because they are secondary capital markets. The original purpose of stock exchanges was the raising of primary capital AND the secondary trading to allow the initial owners to sell out, and others to buy-in, as they saw fit. Over time the exchanges (driven by regulators) have become risk averse, and virtually never see primary capital raising - that role has gone to "angel" investors, private equity, and platforms like Kickstarter. When you see an "IPO", that's simply the first public listing, not the raising of investment capital.

The reason for that little explanation is that money circulating in the secondary equity markets doesn't generally get abstracted from the real economy, because if I invest my savings in 5,000 Diageo shares, other than the trading cost, exactly the same amount of money is released to the seller - every trade has a buyer and a seller. You do "lose" the tiny transaction costs, and the casino economy does absorb a tiny net amount of capital as the shares slowly appreciate in value above the book value of assets, but even then, "market values" are only an approximation based on the last traded value on the secondary market.

Where HFT sucks out money is that it hopes to manipulate the system against other secondary traders, and the "losers" are not the real economy as such, but those involved in secondary equity trading who can't take advantage of HFT to fight back. So perhaps your pension fund, small insurance companies, private day traders, companies putting short term cash into equities are all losers, and the big trading houses (investment banks, larger private equity operations) are the winners. But the losses are individually small and thus do not attract regulatory attention. Individual HFT trades are (edit!) NOT intended to scrape billions of profit in a single trade - these are not automated "London Whale" trades. If individual HFT trades had hundreds of millions of profit potential, the banks would have higher risk exposure, need to raise more capital, and there's be emabrassingly large profits to explain (even by fatcat banker standards). Instead, they are looking for 0.01% additional value on thousands of trades a minute - sometimes driven by mathematics, sometimes trying to exploit millisecond differentials in information between international finance centres, or different trading parties. and sometimes trying to manipulate the behaviours of others for profit.

Personally, I can't see any social value from HFT, and some downsides, but essentially they are just part of the technology genie we've let out of the bottle. If you banned HFT, they'd come up with new ways of using technology to scrape profits. The regulations to stop market manipulation do exist, but the regulators are so far behind the technology curve that they stand little chance of catching the real crooks - hence that day trader from West London being on the hook, rather than RBS or Goldman Sachs. Apparently all the HFT wrong doing in financial markets was down to one bloke living with his parents, trading from his bedroom in his dressing gown. Either that or financial regulators are slow, toothless and clueless.

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Stop

Tax'um

Put a high tax on profits (say 50%) made on stocks or other equities held for less then say ten minuets. This is nothing but straight up gambling.

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Anonymous Coward

Re: Tax'um

Put a high tax on profits (say 50%) made on stocks or other equities held for less then say ten minuets. This is nothing but straight up gambling.

At least in Canada, and possibly in other countries, professional gamblers can offset their losses against their tax liabilities. Combine that with flow-through shares, and you have a pretty interesting business proposition ...

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Anonymous Coward

Re: Tax'um

The tax should be exponential, hold stock for less than a year pay 30% instead of 25% hold it for less than a day pay 90%, less than a second 99.9999999%. also tax by the ratio of cancelled orders to ones that completed.

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Re: Tax'um

A 0.5% stamp duty (as we have in Blighty) would do the job on trades whose margin is less than that. Well, if loopholes weren't there. That's on the entire transaction cost, regardless of profit or loss. Shares held in my pension still make a profit, 'cos margins over the years dwarf such costs.

Though in principle I like the idea of a graduated stamp duty: a stamp duty tapering from zero on shares held longer-term (say, 3+ years) up to maybe 10% on those bought and sold within a day.

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Re: Tax'um

It's enough to tax them a penny a trade to shut down the economically useless parts (with minimal effects for the traditional purpose of the exchanges). The high frequency operations are scams living off your pension fund. But you didn't count on that anyways, did you?

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Re: Tax'um

There is this thing called "price discovery". It's quite important.

http://www.investopedia.com/terms/s/supply.asp

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Re: Tax'um

This issue isn't trades, it's (supposedly) orders.

IDK about equities or other FICC instruments but I believe mowst forex trading venues have a minimum order size of at least $1m, more often $10m or more.

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Re: Tax'um

"Put a high tax on profits (say 50%) made on stocks or other equities held for less then say ten minuets. This is nothing but straight up gambling."

Even a tiny tax, say, 1/4 of a cent, on each trade (not per share, per trade regardless of the value or the size of the trade) would generate a great deal of revenue, be essentially no burden to the individual investor making the occasional trade, and rein in the worst excesses of the high-frequency AI trades.

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Re: Tax'um

"held for less then say ten minuets"

A dance to the music of time.

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Unhappy

But mostly it's an automated MiM attack on actual traders.

And it would not be possible if exchanges did not offer a wide range of bizarre trad types that act as the input to a "trading language" that HFT's can use to prove the exchange for who is buying and selling on a large scale without actually committing their own money.

It's very interesting that when an HFT makes an error and the exchange enforces its buy trades (all those 1 share deals for half the shares traded on the exchange) it can go bankrupt in a few days.

On a level playing field it's impossible to make a profit every single day, year in year out.

Conclusion. It's not a level playing field.

BTW Taxes are a waste of time. Make it a requirement for the anyone who buys a share to trade it or cancel it within 1 second of doing so. Normal people wouldn't care but the parasites who are HFT's will pretty much go out of business.

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Re: But mostly it's an automated MiM attack on actual traders.

alternative solution: stick orders in a queue for xx minutes before they are processed. Takes any speculation (aotomated or otherwise) out of the equation

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Unhappy

"stick orders in a queue for xx minutes before they are processed. "

You're assuming that HFT are actually "speculating"

In fact they are reading the market (though their probe share deals) to find out who is buying and jump the queue. They have a guaranteed customer and a timing edge no real trader can afford to buy.

The real trader is gambling they have real insight into the share they are buying and that it will move as they predict.

IRL imagine someone following you around a shop and (just before you reached for something) buying all of it off the shelf before you did, then turning around and selling what you wanted at a price a bit more than the listed one.

That's what HFT does.

They are parasites.

Traders do make money on short term movements in the markets. A sharp trader really could see news of (say) a major oil spill by an oil company and plan to short (expecting it to fall) or wait (till it has fallen, expecting its price to recover fairly quickly) depending on it. That's a short time scale.

Let's be real. Once a company has sold its shares in the market any direct connection to improving the financial health of the company is gone. Everything else is a gamble on its future to make money by the traders.

What you are actually saying is that you don't like gambling and you want it to stop. That is unrealistic. But HFT's are not gambling. They've rigged the market so no one else can win.

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Re: But mostly it's an automated MiM attack on actual traders.

And it would not be possible if exchanges did not offer a wide range of bizarre trad types that act as the input to a "trading language" that HFT's can use to prove the exchange for who is buying and selling on a large scale without actually committing their own money.

Read this three times and I still don't understand what it means

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Re: But mostly it's an automated MiM attack on actual traders.

alternative solution: stick orders in a queue for xx minutes before they are processed. Takes any speculation (aotomated or otherwise) out of the equation

Merciful heavens... *covers eyes

Dear El Reg Editorial: I suspect there'd be a lot of interest in some interviews with tech people in financial services, especially when it comes to issues where tech and trading rulebooks, regulation etc cross over -- things like HFT -- and there's clearly a lot of misapprehension amongst the readership. How about it?

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Re: "stick orders in a queue for xx minutes before they are processed. "

...a timing edge no real trader can afford to buy

Sure you can. Just use the appropriate brokers. If their commissions made trading unaffordable, no-one would be doing it.

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Unhappy

"Read this three times and I still don't understand what it means"

"No man's ignorance is so great as a man whose livelihood depends on his ignorance." Upton Sinclair.

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Anonymous Coward

Re: But mostly it's an automated MiM attack on actual traders.

Read this three times and I still don't understand what it means

Substitute "trade" for "trad" and "probe" for "prove"? Seems to be clear and sensible to me.

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Unhappy

Substitute "trade" for "trad" and "probe" for "prove"?

Yes. I missed that I'd written "prove" when I meant "probe."

That is the critical idea about how HFT's behave. Building up a picture of the market without having to commit funds first.

People have suggested a "transaction tax" to stop HFT's but HFT are already a transaction tax on the rest of the stock market.

Paid by every non HFT company in the market. for the benefit of HFT companies.

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Government Algorithms

Soon. Soooon. Government's are beginning to realise that algorithms are just laws at lightspeed.

Rather than jumping into the shark tank and trying to declare the implementation, can the Government define the test suite an algorithm must pass to be allowed to play?

And can they *seal* the algorithm to ensure the thing that passed the test is the thing in play? That probably needs a Government-auditable Cloud.

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