Alan Kohler's Take on High Frequency Trading

Starcraftmazter · 12 April 2012

sinner said:
But your statement is not true, the vast majority of market participants ranked by actual participation in the market can in fact afford to buy and colocate servers at the ASX (or similarly connected datacenters).

First of all, I fail to see how ranking them in any way is relevant.

Second, no I doubt they can afford it - it is extremely expensive.

Third, let us say they could afford it at the current rate - there would not be enough physical space nor connectivity for every market participant - not nearly enough.

And having them in a different data centre is clearly inferior.

Thereby, it is inherently unfair and should not be allowed.

wayneL said:
Not quite so clear in equity markets. Suppose Joe bought CBA for $5ish at, or shortly after the IPO... who lost?

But more importantly - what does that have to do with HFTs?

Every $1 they make would be someone else's otherwise. Let's say Joe Sixpack buys $100,000 CBA one day for $49, and it trades at $50 a fortnight later. Mr. Sixpax proclaims "yipee" and hits the sell button - but in that period of time, in between when he hit sell and the order is executed by the ASX, a HFT parasite has taken market actions which result in CBA trading at $49.50 - and good 'ol Joe with six kids to feed, and a wife that just won't shut up about a brand new BMW got 50% less profit.

Sure you could say he should have put in a conditional order to sell at $50, but let's say the price would never reach $50 again and he was too slow to put in that order. The point is, HFTers make money by depriving people of their well earned profits. For every $1 they make, someone will lose a $1 which they would have otherwise made.

wayneL said:
2/ When Joe Sixpack goes into the market to buy some shares, HFTs may have pushed it down or pushed it up. JS is just as likely to benefit by a few ticks.

Private companies do not have the right to randomly pick winners and losers in the market.

wayneL said:
3/ Ergo, HFTs do not compete in any way with buy and holders, they compete with short term traders. As a private short term trader you always have been a guppy amongst sharks. I couldn't give a fat rat's @ss about the HFTs... bring it on, I'll trade against them (and do).

It doesn't particularly matter who they compete with, the point is they cause other market participants to make less profit or even lose money.

wayneL said:
I am incredulous that you claim to be an Austrian.

Without regulation, we cannot have stable, free and fair markets. If we do not have fair markets where everyone has equal opportunity - then it is not capitalism.

skyQuake · 12 April 2012

Starcraftmazter said:
Every $1 they make would be someone else's otherwise. Let's say Joe Sixpack buys $100,000 CBA one day for $49, and it trades at $50 a fortnight later. Mr. Sixpax proclaims "yipee" and hits the sell button - but in that period of time, in between when he hit sell and the order is executed by the ASX, a HFT parasite has taken market actions which result in CBA trading at $49.50 - and good 'ol Joe with six kids to feed, and a wife that just won't shut up about a brand new BMW got 50% less profit.

No way can the HFT algo know a mkt order is coming in. They can react to price and volume but they cannot anticipate Joe's order. Unless Joe sits on the ask at $50, the algo sees his order come in, and *can* frontrun that. But so can the entire market.

The problem is HFTs cant push CBA any more than a few cents without getting smashed by other market participants. And neither can it frontrun the thousands of orders that come in every minute.

In a real life scenario Joe hits the sell mtk button, gets done at $50, or $49.98, or even $50.03, Commsec is the real winner here.

Sure you could say he should have put in a conditional order to sell at $50, but let's say the price would never reach $50 again and he was too slow to put in that order. The point is, HFTers make money by depriving people of their well earned profits. For every $1 they make, someone will lose a $1 which they would have otherwise made.

Its not 0 sum in stocks. And in most cases, HFT would be helping the Joes by providing liquidity. The real whales that move the market ie fundies etc are the ones that are preyed upon.

Private companies do not have the right to randomly pick winners and losers in the market.

It doesn't particularly matter who they compete with, the point is they cause other market participants to make less profit or even lose money.

Yes, I too would like to trade in a market where my competitors are not allowed to make me lose money.

Most of the HFTs are index arb or oppies arb or some sort of arb bot. Because arb opportunities disappear so very very quickly, that is why they have a need to jump the competitor and snap up cheap stock etc. %wise of Aus mkt vol, very little is actual predatory algos that seek out large buy/sell orders and try to frontrun that.

Trembling Hand · 12 April 2012

Starcraftmazter said:
Every $1 they make would be someone else's otherwise. Let's say Joe Sixpack buys $100,000 CBA one day for $49, and it trades at $50 a fortnight later. Mr. Sixpax proclaims "yipee" and hits the sell button - but in that period of time, in between when he hit sell and the order is executed by the ASX, a HFT parasite has taken market actions which result in CBA trading at $49.50 - and good 'ol Joe with six kids to feed, and a wife that just won't shut up about a brand new BMW got 50% less profit.

Sure you could say he should have put in a conditional order to sell at $50, but let's say the price would never reach $50 again and he was too slow to put in that order. The point is, HFTers make money by depriving people of their well earned profits. For every $1 they make, someone will lose a $1 which they would have otherwise made.

Private companies do not have the right to randomly pick winners and losers in the market.

It doesn't particularly matter who they compete with, the point is they cause other market participants to make less profit or even lose money.

OMG. That is the biggest collection of un educated nonsense I have seen in a long time. Its a BOT reacting on PAST data. Not a God knowing when someone will hit a button.

This is just the kind of utter rubbish that Kohler aims at.

Mate go off and learn how a market works. really you will be doing yourself a favor.

moXJO · 12 April 2012

Anyone see the article on Big Blue trading the market?

Starcraftmazter · 12 April 2012

skyQuake said:
Its not 0 sum in stocks. And in most cases, HFT would be helping the Joes by providing liquidity. The real whales that move the market ie fundies etc are the ones that are preyed upon.

I don't really buy this liquidity BS, I'm sure everyone would have more than enough liquidity without HFTs. As for the fundies - do they not manage the money for even more Joe Sixpackian people than Joe Sixpack himself? How is that a good thing?

skyQuake said:
Most of the HFTs are index arb or oppies arb or some sort of arb bot. Because arb opportunities disappear so very very quickly, that is why they have a need to jump the competitor and snap up cheap stock etc. %wise of Aus mkt vol, very little is actual predatory algos that seek out large buy/sell orders and try to frontrun that.

Just because our exchange is not the worst when it comes to HFTers, does not mean we should be complacent about it.

Trembling Hand said:
OMG. That is the biggest collection of un educated nonsense I have seen in a long time. Its a BOT reacting on PAST data. Not a God knowing when someone will hit a button.

I don't know if you're trying to be thick or it comes naturally, but you certainly make an art of it. At no time did I suggest they can tell the future. What I said was that their actions deprive individuals like Joe Sixpack out of profit. Simply put - if they did not exist, the rest of us would make great profits.

Savy?

wayneL · 12 April 2012

Starcraftmazter said:
I don't know if you're trying to be thick or it comes naturally, but you certainly make an art of it. At no time did I suggest they can tell the future. What I said was that their actions deprive individuals like Joe Sixpack out of profit. Simply put - if they did not exist, the rest of us would make great profits.

Savy?

Mate, the ASF code of conduct makes it impossible for me to tell you the truth about you.

Un-freakin'-believable.

Starcraftmazter · 12 April 2012

wayneL said:
Mate, the ASF code of conduct makes it impossible for me to tell you the truth about you.

Un-freakin'-believable.

Maybe it's because you should stick to the debate? Wouldn't it be nice if we all just stuck to the debate and nobody ever got personal?

But I guess at some point people run out of argument and have to resort to other measures

wayneL · 12 April 2012

Starcraftmazter said:
Maybe it's because you should stick to the debate? Wouldn't it be nice if we all just stuck to the debate and nobody ever got personal?

But I guess at some point people run out of argument and have to resort to other measures

It's too difficult debating with fools.

skc · 12 April 2012

Starcraftmazter said:
Every $1 they make would be someone else's otherwise. Let's say Joe Sixpack buys $100,000 CBA one day for $49, and it trades at $50 a fortnight later. Mr. Sixpax proclaims "yipee" and hits the sell button - but in that period of time, in between when he hit sell and the order is executed by the ASX, a HFT parasite has taken market actions which result in CBA trading at $49.50 - and good 'ol Joe with six kids to feed, and a wife that just won't shut up about a brand new BMW got 50% less profit.

Sure you could say he should have put in a conditional order to sell at $50, but let's say the price would never reach $50 again and he was too slow to put in that order. The point is, HFTers make money by depriving people of their well earned profits. For every $1 they make, someone will lose a $1 which they would have otherwise made.

You need to be clear on your arguments?

- Should HFT be banned because they are making profits? Surely not.
- Should HFT be banned because they are making profits at the expense of others? But that's what every trader does. If I make profit, someone else is making a loss or less of a profit. Should they simply ban all trader?
- Should HFT be banned because they use the latest technology?
- Should HFT be banned because they are backed by institutions with more money and resources than the average Joe? Then shouldn't we ban all institutions that isn't the average Joe?
- Should HFT be banned because they serve no real purpose apart from provide liquidity? Again, most traders don't serve any real purpose. So ban them all?

The only reason to control HFT is if they cause instability and dis-orderly market, or if they have any real unfair advantage (not advantage they have because they have $$). And there are certainly aspects of HFT that needs to be controlled.

I've read somewhere before that some exchange "flashes" incoming orders to HFTs so they can be front runned. That is clearly an unfair advantage and should be banned. If there's order stuffing which prohibits other normal orders from reaching the exchange, then that should also be banned.

But HFT should not be banned for any of the reasons you've provided.

Starcraftmazter · 12 April 2012

skc, not quite the reasons you said but because they have an unfair advantage over the ordinary joe, and with that they steal money from other market participants. I use the term "steal" because I deem their actions to be unfair and outside of what the vast majority of market participants have an opportunity to do.

I can rent a single unit of rackspace from a DC in USA for $15 (cheaper if I get more). Now can I get the same from the ASX? No, of course not. The cost for me would be unreasonable.

Would I like to be able to do that at reasonable cost? Hell yeh I would! But I can't - and nor can 99.99% of the people who make trades on the ASX. And that to me seems unfair.

I just want a free, open market which is fair and equal to all. Is that really so much to ask for? Why would some companies be able to do things I can't, and make profits in ways I can't just because they have more money than me? What gives them the right to have preferential market treatment?

nulla nulla · 12 April 2012

Trembling Hand said:
OMG. That is the biggest collection of un educated nonsense I have seen in a long time. Its a BOT reacting on PAST data. Not a God knowing when someone will hit a button.

This is just the kind of utter rubbish that Kohler aims at.

Mate go off and learn how a market works. really you will be doing yourself a favor.

My Bold. Permutations and probabilities. Forecasting, although based on past activites, very accurate and definitely a market mover.

skc · 12 April 2012

Starcraftmazter said:
skc, not quite the reasons you said but because they have an unfair advantage over the ordinary joe, and with that they steal money from other market participants. I use the term "steal" because I deem their actions to be unfair and outside of what the vast majority of market participants have an opportunity to do.

I can rent a single unit of rackspace from a DC in USA for $15 (cheaper if I get more). Now can I get the same from the ASX? No, of course not. The cost for me would be unreasonable.

Would I like to be able to do that at reasonable cost? Hell yeh I would! But I can't - and nor can 99.99% of the people who make trades on the ASX. And that to me seems unfair.

I just want a free, open market which is fair and equal to all. Is that really so much to ask for? Why would some companies be able to do things I can't, and make profits in ways I can't just because they have more money than me? What gives them the right to have preferential market treatment?

Can the average Joe employ an economic professor or a team of quants at reasonable costs? So should any institution that employs economists and quants be banned?

What about just a below average finance graduate - can the average Joe employ one at reasonable cost? So all institution with finance graduates have an unfair advantage?

What about Bloomberg terminal? Or even standalone Iress? Hell many can't even afford Spark... Should all traders with access to these be banned?

Where do you draw the line? People who spends more than $X to facilitate their trading has unfair advantage? What should X be?

Starcraftmazter · 12 April 2012

skc said:
Can the average Joe employ an economic professor or a team of quants at reasonable costs? So should any institution that employs economists and quants be banned?

Whether they can or cannot is irrelevant, and I forgot to mention that I do not feel that other institution with more resources and money than me such as managed funds have some sort of an unfair advantage over me or anyone else; we can all see they fail at delivering consistent, good returns.

It is HFTers in particular who have an unfair advantage over all others because of their special and highly costly relationships with the ASX.

skc said:
What about just a below average finance graduate - can the average Joe employ one at reasonable cost? So all institution with finance graduates have an unfair advantage?

What about Bloomberg terminal? Or even standalone Iress? Hell many can't even afford Spark... Should all traders with access to these be banned?

Where do you draw the line? People who spends more than $X to facilitate their trading has unfair advantage? What should X be?

While I see your point, I'm betting that colocation at the ASX costs significantly more expensive than the things you list. Successful traders should be able to afford them without issues - they need not even be employed by a company. But the bar for having your servers colocated at ASX is clearly much much higher. Also, a service that conveniently and quickly delivers lots of information to you does not to me seem unfair. Anyone could build such a system if they really wanted to, or get the specific pieces of information quickly.

And it is not just that HFTers spend a lot of money - it is the fact that no matter how much the service costs, it is impossible for there to be a server for everyone or even a smaller proportion of people, in the ASX building, getting the fastest access to the exchange. This is another argument, because it is so inherently impossible - it ought to not be allowed.

Trembling Hand · 12 April 2012

Starcraftmazter said:
I don't know if you're trying to be thick or it comes naturally, but you certainly make an art of it. At no time did I suggest they can tell the future. What I said was that their actions deprive individuals like Joe Sixpack out of profit.

Your example about the punter selling his CBA shares and being robbed by a bot is utter nonsense.

This is exactly why this artical from Alan Kohler is so dumb. Fools actually believe that they are being robbed by some all winning, all manipulating, front running, unbeatable BOT.

LOL no wonder BOTs make money. They are trading against punters that cannot understand market basics.

Starcraftmazter said:
Simply put - if they did not exist, the rest of us would make great profits.

hahaha. So now you're not making a profit and looking for someone to blame?

Starcraftmazter · 12 April 2012

Trembling Hand said:
Your example about the punter selling his CBA shares and being robbed by a bot is utter nonsense.

That's not a counter-argument.

Trembling Hand said:
hahaha. So now you're not making a profit and looking for someone to blame?

2+2=3? Move on buddy.

Trembling Hand · 12 April 2012

Starcraftmazter said:
That's not a counter-argument.

Well mate cus I'm so thick and do not understand markets like you just run it through again for me how do HFT rob you of your due profits again?

Starcraftmazter · 12 April 2012

Trembling Hand said:
Well mate cus I'm so thick and do not understand markets like you just run it through again for me how do HFT rob you of your due profits again?

I never said anyone robs me out of my profit. Perhaps you ought to learn not to take people's comments so personally, and then promptly re-read this thread so that you would have a better understanding of the issue at hand before continuing.

skc · 12 April 2012

Starcraftmazter said:
It is HFTers in particular who have an unfair advantage over all others because of their special and highly costly relationships with the ASX.

While I see your point, I'm betting that colocation at the ASX costs significantly more expensive than the things you list. Successful traders should be able to afford them without issues - they need not even be employed by a company. But the bar for having your servers colocated at ASX is clearly much much higher. Also, a service that conveniently and quickly delivers lots of information to you does not to me seem unfair. Anyone could build such a system if they really wanted to, or get the specific pieces of information quickly.

And it is not just that HFTers spend a lot of money - it is the fact that no matter how much the service costs, it is impossible for there to be a server for everyone or even a smaller proportion of people, in the ASX building, getting the fastest access to the exchange. This is another argument, because it is so inherently impossible - it ought to not be allowed.

Allow me to paraphrase your arguments
1. HFTs employ resources that are costly.
2. HFTs employ resources that are finite.
3. HFTs have special relationship with ASX.

1. We've already established that cost (or their capacity to spend to support their trading) isn't an issue. You've made the example yourself that just because some institutions spend a lot of money doesn't mean they have unfair advantage or make consistent return (BTW you have no information on what return is being achieved by the HFTs).

2. All resources are finite. The "finite-ness" of a resource doesn't make it unfair. Space at ASX is finite. Good finance graduates and economists are finite. So the institution who employs the top finance graduates and economists has an unfair advantage?

3. Do they have a special relationship? Or is it just a commercial relationship based on cost? Has ASX denied anyone, who's willing and capable of paying, server space at their premise? What has the ASX made available to the HFTs, and not to you and me (assuming we have the ability to pay)?

Trembling Hand · 12 April 2012

Starcraftmazter said:
I never said anyone robs me out of my profit. Perhaps you ought to learn not to take people's comments so personally, and then promptly re-read this thread so that you would have a better understanding of the issue at hand before continuing.

Come on just give us that example of Joe Sixpack losing out on his CBA profit due to HFT.

Come on I need another laugh.

Starcraftmazter · 12 April 2012

skc said:
Allow me to paraphrase your arguments
1. HFTs employ resources that are costly.
2. HFTs employ resources that are finite.
3. HFTs have special relationship with ASX.

You can break them up and make seemingly legitimate arguments that it is okey - and I don't necessarily disagree with you. However put them all together, to me, it is beyond the threshold that I would consider reasonable.

I do not consider some big company having a lot of good economists at any advantage to myself. Most economists are idiots, and the best ones most certainly do not work for financial institutions - case and point Steve Keen. Other good economists own their own companies and funds (let's say Chanos for instance), and make money through their own skill - not because some finite number of uni grads told them to do this or that.

They can buy all the resources they like, but really I do not feel myself or anyone else at a disadvantage to these banks, institutions, mutual funds, etc - at least for the reasons that you cited (lobbying and corruption would be one advantage, but that's outside the realms of this thread).

But HFTers definitely have a distinct advantage over everyone else. Furthermore, this advantage is constant and quantifiable. Having a bloomberg terminal doesn't mean you will make good decisions. Having the most economists doesn't mean they will form a hivemind to see the future. But having the fastest access to the ASX by a wide margin does mean that you can use mathematics and historical patterns to accurately predict what is about to happen, and profit from it - at the expense of other market participants.

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