Full disclosure: 1) I think HFT has brought nothing good to the world. 2) I'm of the opinion that stock trading in general should be illegal. THAT SAID: If I were to list "immediate existential threats to the modern world" I would not include HFT. Yeah, the flash crash was no bueno but it was nothing compared to, say, LTCM. Yeah, algorithms can manipulate the market but nothing compared to, say, Enron. And yeah, a lot of money can vanish in the stock market if things go wrong but it's a fly on the ass of the elephant that is the bond market. Quoth Michael Lewis, comparing his book The Big Short with his debut from 20 years earlier, Liar's Poker: I mean, the editor in chief of Business Insider, Henry Blodgett, is only an editor because he's been banned for life from trading because of manipulating investors. Clearly, that worked out poorly for him. So yeah - the algorithms fuck up. But humans fuck up worse, they fuck up consistently, and they often fuck up on purpose.…exactly twenty years after Howie Rubin became a scandalous household name for losing $250 million, another mortgage bond trader named Howie, inside Morgan Stanley, would lose $9 Billion on a single mortgage trade, and remain essentially unknown, without anyone beyond a small circle inside Morgan Stanley ever hearing about what he'd done, or why.
I think it's when you pair the two fuck ups that you run into problems. I've just spent ten minutes defending the author to my only intelligent facebook friend so I won't go into detail, but his point that botnets could conceivably -- just through sheer reaction time -- do significant damage to the stock market shouldn't be ignored just because people also from time to time fuck everything up. I'm not sure where he's going with such grandiose language and his use of the word 'existential' was probably to his own detriment. EDIT: apropos of nothing, I've been meaning to ask you if you've read George Friedman' America's Secret War.So yeah - the algorithms fuck up. But humans fuck up worse, they fuck up consistently, and they often fuck up on purpose.
A number of reasons. For one, the only proven, verifiable way to profit long-term is insider trading. Which basically means it's a con game whereby those in power fleece those without. For another, I've seen nothing destroy a company faster than "shareholder concerns." It isn't an "always" thing, but it's a lot harder to execute long-term planning when you're beholden to quarterly earnings reports. I've also never been close (working for or friends with those working for) to a company whose stock price had anything to do with that company's performance or viability. The most striking example for me was when I asked a buddy who worked for Real Networks how his stock was doing: "We're down five percent. It's amazing, really - we released a report yesterday that not only beat our earnings estimates, but actually declared a dividend. We're one of the only profitable dot coms out there. But because our numbers didn't beat moody's, we're down twenty bucks." So really, you've got a distracting game that exists to fleece fools. If Wall Street had to follow the same basic rules as Vegas, I'd be a lot cooler with it.
Yeah but if you give a fancy, technical sounding name like "information asymmetry" then it just sounds like we're not as smart as the other guys, and we deserve to lose. I love the power of manipulative language....the only proven, verifiable way to profit long-term is insider trading. Which basically means it's a con game whereby those in power fleece those without.
kleinbl00 the market is not that simple. If it was everyone would make money. Analysts estimates are a poll done by a financial news source and companies estimates are just where the board thought they would be at that time. Each investor in the market though is going to have their own expectations and perhaps they weren't polled when the estimates were taken. On top of that there are a lot of participants that are going to be trading on momentum or are going to try to arbitrage individual stocks with ETFs their a member of. You have to look at it this way. Thousand of participants all with their own opinions trying to make money. The ones that are right make money and survive. The ones that are wrong lose money and exit the market.
Except that's not how it works. At all. Not even vaguely. You have to look at it this way: You have to look at it this way. Thousand of participants all with their own opinions trying to make money. The ones that are popular make money and survive. The ones that are unpopular lose money and exit the market. In the words of the immortal William Munny, "Deserve's got nuthin' to do with it."You have to look at it this way. Thousand of participants all with their own opinions trying to make money. The ones that are right make money and survive. The ones that are wrong lose money and exit the market.
Hmm. I don't really get what you are saying here kleinbl00. Can you explain it a different way? What does popularity have to do with making money in the market?You have to look at it this way. Thousand of participants all with their own opinions trying to make money. The ones that are popular make money and survive. The ones that are unpopular lose money and exit the market.
Sure - you are arguing for the efficient market hypothesis, which is positively retro of you in light of 2008. Your statement: The ones that are right (whose opinions are correct) "make money and survive." Which is where I go - Worldcom - Enron - Countrywide - WaMu …and point out that up until a couple days before doomsday, the people making money were the ones who thought these companies were sound. So the first problem with the efficient markets hypothesis is windowing - yeah, overall the universe will die of accumulated entropy but that doesn't mean you have a handle on the temperature of Sirius precisely 80 million years from now. I also pointed out my friend at RealNetworks, who were absolutely killing it in 2000 yet the market just hated on 'em. Their lack of valuation impacted their financing and ended up curtailing their business because the market decided they weren't cool enough. So what I'm saying, in very simple terms, is the stock market is a popularity contest, not a "perfect information" contest, particularly as "perfect information" is considered insider trading and is banned by the SEC. It's kind of ironic, if I may say so, to use the efficient market hypothesis as it pertains to HFT. The whole raison d'etre of HFT is to take advantage of the inefficiencies of the markets as experienced by the rubes and marks. As I recall, wasn't Goldman Sachs busted hard-core for basically using the gimmick from The Sting in their HFT - in other words, delaying their reports to the floor and arbitraging the difference?
I'm not arguing that a market mechanism makes a perfect predictor. As I highlighted in one of my responses above you are giving an investor a fair price to trade in their stock ownership for what it is selling at the moment in the market. I dunno how you suppose to fix the problems with funding RealNetworks. If there is no public market are they going to get funding from the government or private investors???? I mean isn't that even more unfair than having a place where any individual can invest in a company and trade what they think is worthy of their valuation?
You asked for a clarification. I gave you one. Do you have a question? Keep in mind - you asked me based on a flippant comment I made several days ago. I did not set out to lay out a treatise on why the stock market should be banned. My interest in this is tertiary at best - the more antagonistically you treat this, the less likely I am to respond.