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Author: yodaorange Big red star, 1000 posts Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 465368  
Subject: Re: YOU are married to High Frequency Trading Date: 10/12/2012 12:22 AM
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A few replies to BJChip's questions and comments. I am changing the order of the questions.

BJ: It is merely a matter of bringing speed-of-light arbitrage back under control and the reasons for trading back into the realm of economics, rather than electronic delays and advantages. .

We have moved light years from the supposed overall goal of Wall Street which is to efficiently allocate capital to its most productive uses. The average non-METARite does NOT understand that all of the stock trading does NOT directly benefit the issuing company. Once Wall Street orchestrates an IPO or secondary offering, the company has the money from the investors. All of the churning after that instant does ~ NOTHING for the company. Some forms of HFT are just an absurd extreme form of having ZERO incremental benefit in the proper allocation of capital.

Many Wall Street products or services do NOT pass the following test:

Prove in advance that this new XYZ product/service WILL improve the efficient allocation of capital, otherwise it cannot be offered.

So it is hard for me to seriously consider that some forms of HFT have any positive economic impact. Note that one form of HFT is the specialist replacement Designated Market Maker algorithm. Clearly this form of HFT is essential for a properly functioning market.

BJ: This is not about going "back to humans" in the exchanges. I have nothing against algorithms. It WILL make certain algorithms unprofitable, and the class of algorithms it "breaks" seems to me to be the ones we'd want broken. .

The challenge is to separate the different types of HFT algorithms. It becomes very gray, very quickly. One man’s undesirable HFT is another man’s greatest thing since sliced bread. Very similar to the debate about hedging versus proprietary trading for the TBTF.

BJ: I tried but failed to understand how a fractional cent or percent tariff/tax/fee applied to every trade is going to make it impossible for the algorithmic trading to continue.

The consensus from sophisticated investors that have NO vested interest is that adding a Tobin Tax will not work. Jason Zweig who is certainly not an apologist for the HFT industry wrote a column that says it will NOT work.

http://blogs.wsj.com/totalreturn/2011/12/13/why-a-financial-...

Yoda’s take is:

1) It will NOT happen because the exchanges have too much power with Congress and the SEC. So as a practical matter it is dead.

2) In one sense, it is very misguided. Investors used to pay say a ¼ (25 cent) spread every time they bought or sold a stock. Nobody ever complained about how bad and unfair it was. It was a fact of life the people accepted. Even if we assume that HFT’s are unfairly taking one or two cents from investors through dubious means, aren’t investors still better off? Doesn’t mean it is right, just that small investors will always be stuck paying the vigorish.

3) In the unlikely event that Congress and the SEC approved a Tobin tax and the exchanges remained on-shore, I am highly confident the extra money will come out of the investor pockets NOT the HFT firms. They would likely just widen the spreads and make investors pay more. Net loser would be the investors.

For the few remaining long term, buy and hold investors, HFT’s have minimal impact.

I don’t necessarily agree with what and how the HFT’s perform. I am just attempting to describe what I view as the most likely scenario going forward. In that context, I don’t see an effective US Tobin tax going forward.

Thanks,

Yoda
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