1) High Frequency Trading Programs account for 70% of market volume
High Frequency Trading Programs (HFTP) collect a ¼ of a penny rebate for every transaction they make. They’re not interested in making a gains from a trade, just collecting the rebate.
Let’s say an institutional investor has put in an order to buy 15,000 shares of XYZ company between $10.00 and $10.07. The institution’s buy program is designed to make this order without pushing up the stock price, so it buys the shares in chunks of 100 or so (often it also advertises to the index how many shares are left in the order).
First it buys 100 shares at $10.00. That order clears, so the program buys another 200 shares at $10.01. That clears, so the program buys another 500 shares at $10.03. At this point an HFTP will have recognized that an institutional investor is putting in a large staggered order.
The HFTP then begins front-running the institutional investor. So the HFTP puts in an order for 100 shares at $10.04. The broker who was selling shares to the institutional investor would obviously rather sell at a higher price (even if it’s just a penny). So the broker sells his shares to the HFTP at $10.04. The HFTP then turns around and sells its shares to the institutional investor for $10.04 (which was the institution’s next price anyway).
In this way, the trading program makes ½ a penny (one ¼ for buying from the broker and another ¼ for selling to the institution) AND makes the institutional trader pay a penny more on the shares.
And this kind of nonsense now comprises 70% OF ALL MARKET TRANSACTIONS. Put another way, the market is now no longer moving based on REAL orders, it’s moving based on a bunch of HFTPs gaming each other and REAL orders to earn fractions of a penny.
The Exchange has draconian power. It can stop time. It can arbitrarily remove trading authority. It can suspend listing. It can make life very unpleasant for someone who tries to fool with it. And it learns, from it’s mistakes.
I wonder how liquid the markets would be without the high frequency trading?
Wow. A bunch of crap. But, the point that we’re all getting robbed and that the market may well be set up for a pullback isn’t crazy.
First, the 70% figure for volume doesn’t seem to be real. Estimates I see are under 50% (which is, to be fair, still high).
We get robbed on transactional costs. If you use a limit order, you pay no more than you agree to pay, and you pay the transactional fee that your broker charges. Period.
The HFTP makes is money (especially when it, as in the example BUY and SELLS at the same price) from rebates from the exchange. So, it’s the exchange that pays them. We pay the exchange solely through our trading costs. We all know what they are… maybe they could be lower, but maybe lower costs would come with larger bid-ask spreads… I don’t know. But if I don’t like the transactional cost, I’m free not to trade. So… meh.
As for the “making the institutional investor pay a penny more”… OK, so in that example if there are no other “asks” at 10.03, that’s true. But so is the flipside — they’re GIVING the institutional buyer a penny more on the sell-side. As long as they’re not buying at one price and selling at another, it’s market neutral (apart from the influence on transactional costs, which I can’t dispute) HFTPS can only operate between the bid-ask spread, and limit orders can be used to deal with that.
There are some shennanigans being played with automated programs with advance information (knowing that there are more orders on the sell or buy side and quick execution to take advantage, etc), and that should be found and stomped out – but I don’t think that it really affected most average investors (read: non day-traders) to any significant degree.
Can I ask a Strange question..?
Im going to ask, anyway..so shut up.
WHAT ARE STOCKS FOR??
I can see stocks for beginning companies.
I can see stocks for commodities..(which is what it was FOR, in the FIRST PLACE)..
But all I see is companies using STOCKS as there power to do R&D and advancement..INSTED of their OWN MONEY, from profits.
Larger corps and LONG old companies should be using THEIR OWN MONEY..They should have bought back ALL the stocks LONG AGO..
Stocks are being used as LONG TERM LOANS..
Thats not what they WERE/ARE FOR..
We’re all gonna die…
#8–Awake==”When I switched from a full service brokerage to Schwab, my trades started executing at below the limit price quite often, something I never saw under the full service system.” /// Beauty!! Reminds me of “full service” at a whore house. I believe it is that last kick to the head when you are in the mud in the alley without clothes on and your wallet in the Madames Safe.
So, isn’t the stock market with all its faults still “the best investment one can make over time?”===hahdhahahahahahahahahaha/
Yep, probably still is. Crumbs from the table.
Speaking of whore houses, I still love Elliot Spitzer. He appears quite regularly on Morning Meeting on MSNBC. Dylan also doing a bang up job of explaining the current mess–simplistic, but some good info here and there.
I wish USA wasn’t so f*cked up that dedicated real men like this have to pretend to be eunuchs to satisfy their bitch constituency.
I think this is dangerous, for those that don’t get it, because it takes the “free” out of “free market.” Stock prices are supposed to be based on collective stupidity, which under many circumstances is actually pretty good.
If a large percentage of trades have nothing to do with valuation of what’s traded, the computers are mostly looking for time advantage on other peoples trades, there is too much noise in the system. Securities could, and probably are, become increasingly unhinged from a fair valuation.
Day to day this would cause a small slippage, but over time it could build up quite seriously. When the markets return to fundamentals the damage might be severe.
Computers are fast and accurate but entirely dumb. There are enough sucker investors, excited day traders, and corrupt bankers out there blowing bubbles. Is it a good idea create a feedback loop using these machines?
Automated market makers? That is a good idea. For profit “liquidity providers” is a bad idea. There is an important distinction.
I dont think it’s just arbitrage. There’s something going on with exploitation of a loophole in being able to see other peoples orders and canceling orders before they go through. I think they need to get that fixed so the playing field is level.
now days, investing is a Random number the Corp makes up.
WE need more money! Raise our Stock price 1 penny, and watch everyone jump on it..
YES!! NOw we can tell the bank we are worth “THIS MUCH”.
Its not worth it..The OLD TIME companies should NOT be valued on the volatility of STOCK, and should be OUT of the market, to keep things STABLE. Take small parts of profit and invest it BACK into the company to invent NEW/better goods and products.
First of all, post 8 contained the most accurate info out of all the comments thus far.
I trade large accounts. What’s strange to me is that most of the people commenting reak of some kind of entitled mentality. What makes you deserve to earn money in the stock market? Who told you that if you stuffed your money into it you would see growth in your account? Do yourself a favor and read Bear, or Fooled by Randomness. People that make a substantial amount of money trading securities are not buy and hold traders. Traders who make money in the markets are the ones who exploit the market. If you think this is unfair… Well too bad. It is what it is. The market does not owe you anything. Either spend time learning how it works, or get eaten by the market and all the automated trading that goes on in it. (by the way, to avoid most of the ‘problems’ that are caused by automated trading, just trade higher time frames) Unfortunately most of you reading this lack the constitution to become experts in the field.
Post Script:
Do yourself a favor and discard the buy and hold mentality. It is no way to secure your financial future.
“real” financiers get their money as part of the IPO and directly thereafter. After that, large account traders are called in to glean the tall wheat. Crumbs for the rest of us.
31,
The Stock market is SINK OR SWIM, and all the stuff in the middle..
UNDER that ideal… SINK THEM..
They KNEW the risk…SINK THEM..
#31 You reek of an entitled mentality.
Stock markets are supposed to put money with productive investments. If, as you say, it is all about momentary advantages that purpose is lost. The financial industry used to be subordinate to production and not the other way around. I think the old way was better.
Of course the little guy often gets shafted in markets due to information imbalances and poor understanding of risk. That isn’t the point.
In the tech bubble many useful things were produced, but everyone went a bit too far believing their own hype. The same thing is true today in finance.
#34 – well said.
BEFORE Utilities were released to the OPEn market..
they were regulated.
AS a utility they made profit and used it to fix everything and pay everyone.
AFTER the dereg, they went to the stock market..WHY? To make money? HOW?? by investments or investors??
AS an investor, you want your investment to GO UP..to GO UP the product has to increase value, the ONLY way for Utilities to be worth more..RAISE THE PRICE of GOODS to raise profits, SO YOU CAN PAY INVESTORS??
Strange. as I see it, without investors, they WOULD HAVE MORE MONEY..