Trading in picoseconds is pure madness

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#1
TODAY Commentary
Trading in picoseconds is pure madness

by Matthew Lynn 04:46 AM Mar 16, 2011

What's the right length of time to own a share? Ten years, perhaps. Five? Or maybe it depends on the company whose shares you are buying.

But seconds, or milliseconds, or even picoseconds? New trading technologies are making it possible to buy and sell stocks in ever tinier fractions of time.

Trading in picoseconds is madness. It makes the stock market more volatile and less useful for companies to raise capital or for investors to earn returns.

In the United Kingdom this month, the technology company Corvil, which includes the London Stock Exchange Group and Deutsche Boerse among its customers, created a stir by predicting that new frontiers in trading speeds were about to open up.

From trading in milliseconds, to microseconds, to nanoseconds, speeds are getting faster all the time. "There are no technological limits preventing firms from trading in picoseconds," CEO Donal Byrne said. For those of us who get our picos mixed up with our nanos, a picosecond is one trillionth of a second. Or, put another way, a picosecond is to one second what one second is to 31,700 years. In less technical language, it's a really, really brief period of time.

It's questionable whether it is possible for the buy and sell instructions to move fast enough. Depending on the location of the computers involved in a transaction, the messages may need to travel faster than the speed of light, which is 186,000 miles per second. Albert Einstein would scoff at the idea.

But why would anyone want to trade that quickly even if it can be done? And should they be allowed to?

For decades, there has been a clear trend for trading to become more and more frantic, and for the owners of equities to hold them for less and less time. In 1940, United States investors held their stocks for about seven years, according to Mr Andrew Haldane, an executive director at the Bank of England. That figure changed very little until the mid-1970s. By 1987, it had dropped to two years. By 2000, it was less than one year, and by 2007 less than seven months.

Much the same is true of Britain. In the mid-1960s, the average share was owned for five years. It was down to two years by the 1980s. Now it is slightly more than seven months, Mr Haldane said in a speech last year.

Seven months may soon seem like several lifetimes. The technology is available to enable speculators to buy and sell a share within fractions of a second. But is that really progress?

A stock market has two core functions. It exists for companies to raise capital needed to invest in their business. And it should help ordinary people to make a decent return on their savings by investing in those enterprises.

As the length of ownership has come down, have the markets gotten better at that? It is hard to argue that they have. If anything, it has made the markets less stable. Many people blamed high-frequency trading for the "flash crash" plunge in share prices on the New York market last year.

Trading equities in fractions of a second is crazy. What can possibly change about the prospects of the Vodafone Group or Nestle in the space of a picosecond? Is their business really any different at the end of any particular fraction of a second than it was at the beginning? If you want to change your mind about owning their shares, maybe you should take a second to think it over. Maybe a whole minute - or even two.

In reality, as shares have been traded more furiously, the stock market has become more volatile, more disruptive and less useful. Sure, it might allow one high-frequency hedge fund to steal a march on another one. But at a certain point, you have to step back and ask whether this is a road we really want to go down, and whether it performs any useful function.

Whether Corvil comes up with its picosecond trading technology doesn't matter much. Someone probably will soon. Information technology makes everything faster and faster all the time. If it can be done, it will be done.

But not all science makes the world a better place - and trading in picoseconds certainly falls into that category.

Just because we can build nuclear weapons doesn't make it a good idea for every country to have a big pile of nukes. And just because we can clone ourselves doesn't mean the world would be improved if we did.

The trading systems we have are fast enough for any reasonable purposes. The stock exchanges should call a halt - and tell the traders that if they only want to hold their investments for a picosecond, they might be better off going somewhere else. Like a racetrack. Bloomberg

Matthew Lynn is a Bloomberg News columnist and the author of Bust, a book on the Greek debt crisis. The opinions expressed are his own.
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
One hypothesis is that the gains from HFT come at the expense of slower partcipants e.g. unit trusts, pension funds because their algorithms anticipate their orders and then move them away by a very small amount.

In which case, it's the fast gaining from the slow: not exactly saintly, but if it works then it's not pure madness for those who do it.
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#3
I am still holding singtel since its IPO in 1993!
I qualified to be a slower participant.
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#4
  • Oct 26 2015 at 9:26 AM 
High Frequency traders shift to futures markets
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[img=620x0]http://www.afr.com/content/dam/images/g/k/i/8/s/g/image.related.afrArticleLead.620x350.gki8pq.png/1445813141218.jpg[/img]High Frequency trading is shifting from the cash equities market to the Futures exchanges, according to ASIC's latest review. Tim Boyle
by Jonathan Shapiro
High frequency traders had become more sophisticated and aggressive and had increased gross revenues while trading more "mid-tier" securities.
report released on Monday, by the Australian Securities and Investment Commission estimates that high frequency trading firms earned revenues of between $110 million and $180 million in the 12 months to March 2015, a "material" cost of around one basis point to users. 

The report said that the use of dark pools had remained constant accounting for about 25 to 30 per cent of all activity – but was diverting back to its original intention – for large block trades.

While ASIC said that most of the initial concerns about dark pools had abated it was still worried that some exchange users had sought to preference some users over others and harboured doubts about how conflicts of interest between clients and in-house trading units were managed.
SHIFT TO FUTURES MARKETS

High frequency traders are moving more trading to bond and equity futures markets according to the latest report.
ASIC figures show that the level of HFT in equity markets remained steady at 27 per cent of turnover but trading in futures markets had more than doubled since December 2013 with HFT accounting for 14 per cent of turnover in the SPI equity futures market and 14 per cent in bond futures.
ASIC said that while these levels were not currently concerning, it would continue to monitor their developments.
The ASIC review into high speed trading and "dark liquidity" where trading takes place away from the public exchanges said that financial market users were adapting to markets populated by machine traders.


The report concludes that their rise was not "adversely affecting the function of Australian markets for businesses and investors".
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#5
It seems that HFT is popular in ASX, but non-existence in SGX, at least for the time being.

Based on a statement in the link, "HFT had made the equity market a ‘rigged casino’", so can we safely conclude that ASX is more casino-like than SGX now? Tongue

https://www.fool.com.au/2014/04/10/will-...y-trading/
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#6
(26-10-2015, 09:57 AM)CityFarmer Wrote: It seems that HFT is popular in ASX, but non-existence in SGX, at least for the time being.

Based on a statement in the link, "HFT had made the equity market a ‘rigged casino’", so can we safely conclude that ASX is more casino-like than SGX now? Tongue

https://www.fool.com.au/2014/04/10/will-...y-trading/

Hi CF,

I think you are mistaken... badly mistaken... algo trading is also part of HFT and they are ever present on global markets. 

If you think that HFT, ETFs and recent volatility are not interlinked, your views are being too narrow.

The main reason on why I m so hard on this topic is that I used to be a day trader and my feel with regards to the trading patterns on global exchanges are not merely limited to my reading but also my conversations with mkt participants.

SGX's ignorant on several issues raised by my buddies remaining in the industry is a SGX structural problem. While their denial over several issues raised are their arrogance IMHO, not admitting doesn't mean non-existence of problems or practices...

GG
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#7
HFT(s) is part & parcel of technological advancement whereby company(ies) like Citadel LLC operated proprietary system to meet their needs; day-trading revenue. In other exchange(s), HFT is allowed to a certain extend but in SGX, my belief is the controlled-regulatory exchange won't permit such trading methods.

This is to control the mobility without sudden shock wave and to ensure stability within this red dot.

The question is what would happen if HFT is enabled in our financial market?

SK
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#8
(27-10-2015, 10:17 PM)greengiraffe Wrote:
(26-10-2015, 09:57 AM)CityFarmer Wrote: It seems that HFT is popular in ASX, but non-existence in SGX, at least for the time being.

Based on a statement in the link, "HFT had made the equity market a ‘rigged casino’", so can we safely conclude that ASX is more casino-like than SGX now? Tongue

https://www.fool.com.au/2014/04/10/will-...y-trading/

Hi CF,

I think you are mistaken... badly mistaken... algo trading is also part of HFT and they are ever present on global markets. 

If you think that HFT, ETFs and recent volatility are not interlinked, your views are being too narrow.

The main reason on why I m so hard on this topic is that I used to be a day trader and my feel with regards to the trading patterns on global exchanges are not merely limited to my reading but also my conversations with mkt participants.

SGX's ignorant on several issues raised by my buddies remaining in the industry is a SGX structural problem. While their denial over several issues raised are their arrogance IMHO, not admitting doesn't mean non-existence of problems or practices...

GG

Hi GG,

We have different definition of HFT, but I am pretty sure I am having the same definition with the articles posted. We have similar topic in the past, and I have posted my view on the matter.

HFT is part of algo trading, but not the other round. I will be very amazed, if a trader who have done simple algo trading, calling himself HFT trader.  Tongue

Not admitting might mean non-existence, right? I am surprised your persistence on the matter, since the "HFT existence" isn't hard to verify, especially by market player. I reckon it is the confusion on the definition, between algo trading and HFT

I am against the HFT, because of unfair competition. I am supporting of algo-trading, because of fair and more productive means of doing the same job.

May be this should be the last post on the matter.
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#9
(28-10-2015, 10:22 AM)CityFarmer Wrote:
(27-10-2015, 10:17 PM)greengiraffe Wrote:
(26-10-2015, 09:57 AM)CityFarmer Wrote: It seems that HFT is popular in ASX, but non-existence in SGX, at least for the time being.

Based on a statement in the link, "HFT had made the equity market a ‘rigged casino’", so can we safely conclude that ASX is more casino-like than SGX now? Tongue

https://www.fool.com.au/2014/04/10/will-...y-trading/

Hi CF,

I think you are mistaken... badly mistaken... algo trading is also part of HFT and they are ever present on global markets. 

If you think that HFT, ETFs and recent volatility are not interlinked, your views are being too narrow.

The main reason on why I m so hard on this topic is that I used to be a day trader and my feel with regards to the trading patterns on global exchanges are not merely limited to my reading but also my conversations with mkt participants.

SGX's ignorant on several issues raised by my buddies remaining in the industry is a SGX structural problem. While their denial over several issues raised are their arrogance IMHO, not admitting doesn't mean non-existence of problems or practices...

GG

Hi GG,

We have different definition of HFT, but I am pretty sure I am having the same definition with the articles posted. We have similar topic in the past, and I have posted my view on the matter.

HFT is part of algo trading, but not the other round. I will be very amazed, if a trader who have done simple algo trading, calling himself HFT trader.  Tongue

Not admitting might mean non-existence, right? I am surprised your persistence on the matter, since the "HFT existence" isn't hard to verify, especially by market player. I reckon it is the confusion on the definition, between algo trading and HFT

I am against the HFT, because of unfair competition. I am supporting of algo-trading, because of fair and more productive means of doing the same job.

May be this should be the last post on the matter.

YMMV.

As long as we are dealing with robots that are emotionless, we have to be aware of the risks.

I was a day trader when HFT/algo was non-existent and I well and truly understand the plight of genuine investors being tormented by robots.

Professional opinions on this issue should be seriously taken on board especially since domestic voices have been drowned.

GG
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