Showing posts with label High Frequency Trading. Show all posts
Showing posts with label High Frequency Trading. Show all posts

Tuesday 24 July 2012

Investor time horizons are increasingly measured in nanoseconds. However, long-term investing makes sense.

Warren Buffett is all the proof John Kay needs that long-term investing makes sense 

The Kay review identifies the problem, but tackling corporate and investor "hyperactivity" needs a cultural revolution.

Warren Buffett, chairman and CEO of Berkshire Hathaway, eats an ice cream bar made by Berkshire subsidiary Dairy Queen prior to the annual shareholders meeting in Omaha, Neb
Billionaire investor Warren Buffett Photo: AP
John Kay must be an optimist.
He’s just produced a 113-page report into short-termism in UK equity markets. Who does he think’s got the concentration span to read that? Three pages would be a stretch for most of the people it’s aimed at. And that’s allowing for page 2 being intentionally blank – like the mind of any top City trader.
Luckily, you don’t have to delve too far into Kay’s critique of “hyperactive” companies and investors all seeking “immediate gratification” to spot that the economist has done an OK job of identifying the problem. Whether his recommendations will ever fix it is another thing entirely. Even Kay admits he can only offer “long-term solutions”, which sounds kind of circular.
For him, the blame for the current knee-jerk investment environment is shared pretty equally between companies and shareholders.
UK-listed companies continually lag their peers in Germany, America and France when it comes to traditional benchmarks of long-term thinking, such as business investment or R&D spend.
And it’s not hard to see why when companies are run by bosses caught awkwardly between their next bonus or a pay-off, with the average tenure of a FTSE-100 chief executive less than five years. No wonder they tend to go for the supposed quick fixes of internal shake-ups, financial engineering or M&A rather than making decisions that might reward their successor. They do that too, as Kay shows, despite nasty history lessons from the likes of GEC, ICI and Royal Bank of Scotland.
Meanwhile, investor time horizons are increasingly measured in nanoseconds – and not only those of high-frequency traders otherwise known as computers. Quarterly targets and the bonuses that ride on them have made fund managers increasingly twitchy, while the distance between the company and the saver who wants to invest in it has been lengthened by a costly chain of middle-men each taking a cut, including investment consultants, independent financial advisers and pension trustees. What gets lost in the process is any real engagement between the company and its shareholders.
Kay’s solution for all this, as he admits, amounts more to cultural revolution than quick fix – a sort of everyday “shareholder spring”. Among his 17-point plan is the proposal to axe all cash bonuses for directors, replacing them with share-based awards that must be held “at least until after the executive has retired from the business”. He’d also like an end to mandatory quarterly reporting (wouldn’t we all) for both fund managers and companies.
Then there’s his proposal for a new stewardship code that goes beyond the current focus on corporate governance to push shareholders to ask hard questions on such things as strategy and capital allocation – though if they’re not doing that already, what are they getting paid for? He’s keen too on a new “investors forum”, so shareholders can club together to club the management or, as he ventured on Monday, to help sort out the Barclays board – even if that looks wishful thinking.
Sure, much of this, if ever implemented, might encourage a more long-term approach – though Kay could have saved himself some words by getting to the apotheosis of such investment earlier than page 56. It’s there he mentions the man who once declared “our favourite holding period is forever”, adding: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
As one of the richest men on the planet, Warren Buffett kind of makes Kay’s case for him.

Tuesday 26 June 2012

The pros and high frequency traders rule the world. Is the Buy & Hold Stock Strategy Officially Dead?


If you hold onto an investment for longer than five days, consider yourself the new millennium’s version of Benjamin Graham.
Benjamin Grahamn, author of 'Intelligent Investor'
Source: Reed Business Information, Inc.
Benjamin Graham, the economist often considered the father of value investing.

The average holding period for the S&P 500 SPDR (SPY), the ETF which tracks the benchmark for U.S. stocks, is less than five days, according to shocking statistics in analyst Alan Newman’s latest Crosscurrents newsletter.
“Given recent average volume, the SPY trades its entire capitalization and then some each and every week,” wrote the always-provocative analyst. “Does anyone really wish to argue where valuation might enter the picture in this scenario? Value does not matter in the slightest.”
Analysts blame the hot potato market on the disappearance of the individual investor and the entry of the high-frequency trader. After three bear markets in the last decade, individual investors – especially baby boomers careening toward retirement – don’t have the risk tolerance to be burned once again.
“True liquidity has not come back and the pros and high frequency traders rule the world,” said Brian Stutland of Stutland Volatility Group. “Plus, if the average person ever comes back, then they won't have time to play all day long back and forth in the market. So, maybe buy and hold really is dead.”
Newman notes in his newsletter that the average holding period for all stocks was almost four years from 1926 through 1999. After a tech mania, a housing bubble, and the explosion in electronic trading, the average holding period sits at just 3.2 months today.
The decline in mutual funds and rise of short-term oriented hedge funds are also partly to blame for this trend, investors said.
“From the hedge fund perspective, we are judged on monthly performance, and three months is a lifetime,” said Brian Kelly of hedge fund Shelter Harbor Capital. “Ask any hedge fund or mutual fund manager for how long do they believe they can underperform the market and I guarantee they will tell you, ‘One quarter.’”
In one of the most extreme examples of our day-trading, computer-driven investment culture, Newman unveils this gem: “In the three months from the beginning of March to the end of May, transactions in Apple comprised one of every $16 traded in the U.S. market, very likely the most concentrated focus on one stock in stock market history.”
How many of the human beings or machines behind those trades looked at Apple’s price-earnings ratio?
“I speak with retail investors every day and I can tell you that more than ever, they believe that the stock market is a casino for the large and well-connected investors,” said Mitch Goldberg, ClientFirst Strategy in Woodbury, NY. “Of course, different investment styles go in and out of favor every so often, so to be a long term investor, you’d need a ton of patience and very thick skin. Eventually, the Graham and Buffett way will be back in favor and I think that is what will encourage the retail investor to step back into the market.”

Sunday 14 August 2011

Lord Myners calls for inquiry on 'black box' trading


Lord Myners has called on the Government to launch a focused inquiry into so-called "black box" computerised trading in the wake of extreme volatility in the UK's biggest companies.

Lord Myners has called on the Government to launch a focused inquiry into so-called
High-frequency trading (HFT), which accounts for as much as 50pc of trading in London, has been blamed for exacerbating intra-day swings and putting ordinary investors at a disadvantage due to the speed with which such trades are placed in the market. Photo: Getty Images/Scott Barbour
The former City minister said that high-frequency trading also known as black box trading had been a "contributing factor" in the harsh swings which have led to more than £300bn being wiped off the value of British shares since the beginning of July.
He wants both the Treasury and the Financial Services Authority (FSA), the City regulator, to investigate thoroughly the phenomenon and the impact it has.
High-frequency trading (HFT), which accounts for as much as 50pc of trading in London, has been blamed for exacerbating intra-day swings and putting ordinary investors at a disadvantage due to the speed with which such trades are placed in the market.
Lord Myners, the former fund manager, also called for European banks, which have been at the centre of the storm, to be more honest to investors and increase levels of disclosure of the sovereign debt they are holding.
His calls on disclosure were echoed by Georges Pauget, an adviser to the French government, who said banks must be more open with investors if they are to end the market fears that have led their share prices to collapse in recent weeks. The comments from the two men come after a wild week in global stock markets.
The nadir came last Wednesday, when investors moved strongly against Societe Generale, France's largest bank, forcing its shares down as much as 20pc. As a result, European regulators chose to ban shorting on banks in France and three other countries.
But Lord Myners said that rather than shorting – which he said was not a contributing factor in falling bank shares – there was a "greater need to address" such trading methods.
"High-frequency trading appears so detached from the true function of capital markets, but is potentially fraught with hazard. It definitely deserves more attention than either the FSA or the Treasury has given it."
Lord Myners has tabled a series of questions in the House of Lords on the subject. Lord Sassoon, commercial secretary to the Treasury, said last week in a written answer that the Government's two-year study into the "Future of Computer Trading in Financial Markets", would not report until autumn 2012.
Andy Haldane, the Bank of England's executive director for financial stability, last month warned now may be the time to set a "speed limit" on market trades to tackle the dangers posed by so-called "flash trading" by high-speed computers.
Larry Tabb, founder of financial market research house Tabb Group, said although HFT was not directly to blame, it was indirectly to blame for removing large swathes of liquidity from the market, meaning that when sizeable sell orders are made, prices drop further than they might have done.
Lord Myners' calls for wider disclosure were echoed by Mr Pauget, the former chief executive of Credit Agricole, who said banks should move quickly to give better disclosure of their funding positions to reassure the markets they are well-financed.
"They have to provide more information. Banks have to give more information on liquidity," said Mr Pauget. He went on to say there was a growing need for all banks to give more details of their net stable funding ratios, which show the proportion of a bank's assets that are financed with longer-maturity debt.
His comments come amid concern that the UK's largest banks are on a collision course with the FSA over the need for more detailed disclosure of the amount and type of sovereign debt each is holding.

Sunday 3 October 2010

Single trader sparked Wall Street's flash crash

October 2, 2010

A computer-driven sale worth $US4.1 billion ($4.24 billion) by a single trader helped trigger the May flash crash, which sent the Dow Jones Industrial Average dropping nearly 1000 points in less than a half-hour and set off liquidity crises that ricocheted between US futures and stock markets.

A report issued on Friday by the US Securities and Exchange Commission and the Commodity Futures Trading Commission determined the plunge was caused when the trading firm executed a computerised selling program in an already stressed market.

The report did not identify the trader by name, but internal documents obtained from futures exchange operator CME Group identified that trader as money manager Waddell & Reed Financial.

The long-awaited report focused on the relationship between two hugely popular securities - E-Mini Standard & Poor's 500 futures and S&P 500 "SPDR" exchange-traded funds - and detailed how high-frequency algorithmic trading can sap liquidity and rock the marketplace.

"The interaction between automated execution programs and algorithmic trading strategies can quickly erode liquidity and result in disorderly markets," the report said.

The "flash crash" sent the Dow Jones Andustrial Average plunging within minutes, exposing flaws in the electronic marketplace dominated by high-speed trading.

The report lays the foundation for a commission to recommend new rules to avoid a repeat. At least one lawmaker threatened congressional action if regulators did not address the disparity in the markets.

Trading was turbulent that afternoon because of concerns over the European debt crisis. Against that backdrop, a "large fundamental trader" initiated a sell program to sell 75,000 E-Mini contracts as a hedge to an existing equity position, according to the 104-page report.

Citing documents from CME Group, Reuters reported on May 14 that Waddell sold a large order of E-Minis during the market plunge, identifying the firm to which the chairman of the Commodity Futures Trading Commission, Gary Gensler, had alluded in congressional testimony.

The CFTC had resisted naming Waddell in Friday's report because of laws that allow it to withhold such information from the public, sources have said.

Waddell's selling algorithm had "no regard to price or time," the report said. That, coupled with the "aggressive" reaction by high-frequency traders hedging their positions, led to two separate "liquidity crises" -- one in the E-minis, the other among individual stocks.

Waddell's algo "responded to the increased volume by increasing the rate at which it was feeding the orders into the market, even though orders that it already had sent to the market were arguably not yet fully absorbed by fundamental buyers or cross-market arbitrageurs," the report said.

These arbitrageurs transferred the selling pressure to the stock market, sparking a "hot-potato" effect among high-frequency traders that rapidly passed the same positions back and forth.

Meanwhile, the report continued, the stock market began plunging as trading pauses kicked in at individual firms, as high-frequency traders became net sellers, and as market makers began routing "most, if not all," retail orders to the public markets -- a flood of unusual selling pressure that sucked up more dwindling liquidity.

Shares of Waddell edged higher on Friday. They fell sharply on the day of the initial Reuters report.

The unprecedented flash crash called into question many of the regulatory and technological changes over the last decade, which ushered in an era of lightning-quick trading on dozens of mostly electronic exchanges and alternative venues.

Data to the beginning of this month show that funds have exited mutual funds in every week since early May. Meanwhile, the 20-day moving average of the S&P 500's daily volume shows a slow decline since late May, according to Reuters data.

"I do not expect today's report to restore the confidence that was lost as a result of the flash crash," said David Joy, Minneapolis-based chief market strategist at Columbia Management, a large money manager.

"Most individual investors do not fully understand how high-frequency trading works, only that it can create volatility and seems to put them at a disadvantage. Only time, and higher stock prices, will restore that lost confidence."

The SEC, under enormous political and public pressure to act, in the last few months adopted new trading curbs known as circuit breakers and proposed establishing a consolidated audit trail of all stock trading.

Lawmakers seized on the latest report as a reason for the SEC to do more to fix the fragmented markets.

"The SEC should seriously consider ways to slow things down when markets get volatile," said Democratic Senator Charles Schumer.

Democratic Representative Paul Kanjorski said regulators must act quickly to revise market rules.

If necessary, Congress must "put in place new rules of the road to ensure the fair, orderly and efficient functioning of the US capital markets," Kanjorski said.

The flash crash report comes just as the SEC and the CFTC have begun drafting nearly 200 rules required by the landmark Wall Street reform legislation, which includes a revamp of the opaque over-the-counter derivatives market.

Reuters

http://www.smh.com.au/business/markets/single-trader-sparked-wall-streets-flash-crash-20101002-161fr.html

Friday 7 May 2010

Understanding High Frequency Trading (HFT): Wall Street's Latest Scam

Wall St, New York, USA, 17 August 2009. The new cream-skimming trick in Wall Street's playbook is called High Frequency Trading, or HFT.


It works like this: big trading banks invest in super-computers that can process information at every faster speeds, splitting nano-seconds into smaller and smaller units. These super-computers can process instructions faster than regular computers, and much faster than humans. Next, they place these super-computers in the exchanges themselves. This gives direct access to the exchange, cutting out the latency of connections from remote locations. By trading faster than smaller investors, profits can be constantly churned. 




High Frequency Trading (HFT): Wall Street's Latest Scam


http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.economywatch.com%2Feconomy-business-and-finance-news%2Fhigh-frequency-trading-hft-wall-streets-latest-scam-18-08.html

Saturday 19 December 2009

High Frequency Trading (HFT): Wall Street's Latest Scam

High Frequency Trading (HFT): Wall Street's Latest Scam



Goldman Sachs and friends are hanging us out to dry with HFT


"It appears exchanges are conspiring with a privileged group of high-frequency traders in a massive fraud," Fund Manager Whitney Tilson.

Wall St, New York, USA, 17 August 2009. The new cream-skimming trick in Wall Street's playbook is called High Frequency Trading, or HFT.


It works like this: big trading banks invest in super-computers that can process information at every faster speeds, splitting nano-seconds into smaller and smaller units. These super-computers can process instructions faster than regular computers, and much faster than humans. Next, they place these super-computers in the exchanges themselves. This gives direct access to the exchange, cutting out the latency of connections from remote locations. By trading faster than smaller investors, profits can be constantly churned.

Institutional investors will often divide large purchases up into many small blocks that will be bought or sold within specified price ranges. HFT players seek to determine the price range by sending out quotes that are issued and almost immediately cancelled. They can execute thousands of such trades in a second. If they hit on a price in the acceptable price range, they can fulfil the order and then sell it on to the investor microseconds later for a tiny profit. Do this long enough and you can rack up impressive profits.




This is not an obscure phenomenon. Estimates say that 50 per cent to 70 per cent of traded volume on the NYSE is carried out by High Frequency Traders, or HFTs. That's right; high-speed gouging of retail investors and large institutions now makes up the bulk of trading. It has directly led to Goldman Sachs pulling in record profits, and recording 46 '$100 million' trading days, when the economy is dead and corporate M&A activity is at record lows. If you wondered how they pulled that one off, here's how. It has become the very heart of investment banking, which explains the vigour with which Goldman's pursued a former employee who tried to create a new business using HFT computing code that he had developed. He has been arrested for theft.

We would argue that Goldman Sachs is guilty of much worse crimes. True it is legal, but Democratic Senator Charles Schumer and the London Stock Exchange are looking to change the rules to stop at least some HFT practices.

High Frequency Traders, or HFTs, come in a number of guises. Academic research published in the paper "Toxic equity trading order flow on Wall Street" lists the following types of plays, which it says are more responsible for market volatility than the financial crisis:

Liquidity rebate traders - Exchanges (at least some of them) offer rebates of about 0.25 cents per share to large brokers who bring in liquidity. They can re-offer shares at exactly the same price and still make a profit. Of course if they can offer the shares at a marginally higher price they will make more profit, as will the exchanges. Tilson said the exchanges are complicit because of these rebates, and the additional access they offer.

Predatory algorithmic traders - By placing small buy orders that are withdrawn, they fool institutional traders by bidding up the price of the stock, which is bought at higher prices as the series of small orders are executed to fulfil the big transaction. Later in the process the "predatory algo" shorts the stock at the higher price it has reached. The institutions then cover the short at the higher price.

Automated market makers - This HFT play involves"pinging" stocks with probe orders that are almost immediately cancelled, as described earlier. When a price is discovered, the shares are bought elsewhere and sold-on to the institution.

Program traders - By buying large numbers of stocks at the same time, they can trick institutional trading programs by triggering large buy orders that are tied to price moves. Once the institutions bite they can sell the stocks for a profit, leaving the traders as the 'patsy'. Flash traders - In this HFT scam, flash traders give an order to only one exchange. They execute it when - and only when - the order can go through without triggering "best price" procedure intended to give sellers on all exchanges a chance at meeting the best price. The Nasdaq will close the flash trading loophole on the 1st September 2009, and the SEC says it will ban this technique.

Nobel Economist Paul Krugman has been analyzing these traders and finds no economic value in what is being done; in fact he believes that if anything they are destroying value. "The stock market is supposed to allocate capital to its most productive uses, such as by helping companies with good ideas raise money. It's hard to see, however, how traders who place their orders one-thirtieth of a second faster than anyone else do anything productive," said Mr Krugman. "There is a good case that such activities are actually harmful. HFT probably degrades the stock market's function, because it's a kind of tax on investors who lack access to super computers and at-exchange connectivity - which means that the money Goldman spends on those computers actually has a negative effect on national wealth. As economist Kenneth Arrow said in 1973, speculation based on private information imposes a 'double social loss', by using up resources and undermining markets."

Not satisfied with milking the taxpayer, Goldman and friends have also escalated the profiteering arms race and are looking to skim everyone in the trading arena - partners, clients and each other. Can regulators keep up with the speed of their innovation and put in place sensible restrictions to protect the rest of us?

Juan Abdel Nasser, EconomyWatch.com


http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.economywatch.com%2Feconomy-business-and-finance-news%2Fhigh-frequency-trading-hft-wall-streets-latest-scam-18-08.html