Is High Speed Stock Trading Between Computers Safe?

[moejoe15]

I can tolerate a person trading with a computer or a computer trading with a person but computers trading stocks with computers? That seems incredibly and obviously wrong to me or am I missing something here?

Never mind my philosophical objections, I think it's just plain dangerous. If computers are trading with computers than they are all presumably using different proprietary algorithms. I would say that the algorithms, because they are different, will inevitably clash and have a cascade effect, possibly causing a market crash. The one day major spike down a little while ago was attributed to that by some but I guess the blame was shifted elsewhere.

All it could take is for some selling to trigger another algorithms quirk, bad code or just difference and more selling and for it to cascade and you have a quick crash. If that happens guess who gets screwed? The infinitely slower human traders.

 

[Office_Shredder]

No, the humans probably make out like bandits. The computers start offloading all their stock at stupid low prices, and the rest of the stock market gets to drop as well. But this stuff isn't ONLY defined in value based on perception, there's real value to the companies being traded. So if you're human you just think "oh gee, Microsoft is trading for pennies on the dollar", buy it all up and wait for the price to go up.

Furthermore, if the market as a whole drops by a certain amount it closes automatically. So everyone would have the rest of the day to say 'well that doesn't make any sense' and the prices would recover.

Yeah if that was the day you were planning on offloading all your stock and moving to Bermuda it probably sucks for you but that's the risk you take when you play the stock market game

 

[rootX]

Stock markets have some regulations, I think computers cannot produce very variable prices. This would result in the temporary closing of the entire stock market.

 

[aquitaine]

Never mind my philosophical objections, I think it's just plain dangerous. If computers are trading with computers than they are all presumably using different proprietary algorithms. I would say that the algorithms, because they are different, will inevitably clash and have a cascade effect, possibly causing a market crash. The one day major spike down a little while ago was attributed to that by some but I guess the blame was shifted elsewhere.

They aren't AI's or anything like that. There are some big limits on what they can do.

 

[turbo]

Perhaps there are some controls, but I would strongly support a per-transaction tax on short-term trades. I don't mean per block trade. I mean a tax on every single share traded. Twofish can elaborate if he doesn't want to get fired, but we don't this type of fake "investing" in the US. It is destructive. We don't need to have the stocks in important companies being fluffed up and being dumped just so some billionaires can make more money. Whatever happened to strategic investing, picking good companies, and riding out the highs and lows?

 

[edward]

We did have the "flash crash" in 2010.

http://en.wikipedia.org/wiki/2010_Flash_Crash

The May 6, 2010 Flash Crash[1] also known as The Crash of 2:45, the 2010 Flash Crash or just simply, the Flash Crash, was a United States stock market crash on May 6, 2010 in which the Dow Jones Industrial Average plunged about 1000 points—or about nine percent—only to recover those losses within minutes. It was the second largest point swing, 1,010.14 points,[2] and the biggest one-day point decline, 998.5 points, on an intraday basis in Dow Jones Industrial Average history.

 

[WhoWee]

I can tolerate a person trading with a computer or a computer trading with a person but computers trading stocks with computers? That seems incredibly and obviously wrong to me or am I missing something here?

Never mind my philosophical objections, I think it's just plain dangerous. If computers are trading with computers than they are all presumably using different proprietary algorithms. I would say that the algorithms, because they are different, will inevitably clash and have a cascade effect, possibly causing a market crash. The one day major spike down a little while ago was attributed to that by some but I guess the blame was shifted elsewhere.

All it could take is for some selling to trigger another algorithms quirk, bad code or just difference and more selling and for it to cascade and you have a quick crash. If that happens guess who gets screwed? The infinitely slower human traders.

Firms have always had trading strategies - it's just on a much larger scale at a much faster rate now. If you think about it, the computer doesn't rely on the weakest link - the floor trader.

 

[AlephZero]

Why do you think it is any more dangerous than what happened in 1929, without computers? (And there are other examples around the world from hundreds of years before 1929.)

 

[MarcoD]

We did have the "flash crash" in 2010.

Temporarily, $1 trillion in market value disappeared. Some people must have gotten very angry, and some people must have gotten very rich.

 

[CAC1001]

Computers handle a lot of the trading these days from what I understand of it. They operate on algorithims, but those algorithms must be constantly refined. The algorithms can very much resemble the mathematics of other professions (like the physics of stars as one person mentioned in another thread), however, being that finance ultimately comes down to humans, occassionally the math (and hence the algorithms) all break down due to humans behaving oddly. It's like physics but where the electrons have feelings.

Perhaps there are some controls, but I would strongly support a per-transaction tax on short-term trades. I don't mean per block trade. I mean a tax on every single share traded. Twofish can elaborate if he doesn't want to get fired, but we don't this type of fake "investing" in the US. It is destructive. We don't need to have the stocks in important companies being fluffed up and being dumped just so some billionaires can make more money. Whatever happened to strategic investing, picking good companies, and riding out the highs and lows?

That's value investing, and isn't the same thing as trading. It only applies to companies as well. Remember, lots of things aside from stocks are traded. A trader is like a really sophisticated gambler. Everything from stocks, bonds, options, futures, currencies, commodities, etc...are traded. They even trade the weather (as the weather can affect various industries and the global economy in various ways). They also trade pollution and energy credits (that's what Enron was into). One of the reasons the financial institutions want carbon cap-and-trade passed is because it would allow them to make billions in trading carbon credits. When it comes to stocks, unlike a value investor, who looks at the actual fundamentals of the company regarding the stock, the trader just looks at it like a thing being gambled on. Interestingly, you will find that the same people who originated the usage of mathematics in trading in the financial system also applied these same mathematical strategies at casinos in Las Vegas, where they found they could win consistently at various gambling and games (like Blackjack). This was back in the 1960s though, don't try it today, as they watch for that stuff! Here is a good book on it: Fortune's Formula.

In the late 1990s, you had Long Term Capital Management, which was set up by a couple of extremely smart academics, but they were too smart for their own good. They thought that they had created a scientific, mathematical way of beating the market. Their firm almost blew up (it needed a bailout, one of the only hedge funds to ever require this). The most successful hedge-fund today is Renaissance Technologies, founded by James Simons, who is a mathematician who co-authored a paper in geometry that won him the American Mathematical Society's Veblen Prize in Geometry (from what I understand, string theory physicists have found this paper incredibly useful). A lot of people think of traders as leeches on the system, as people who do not really produce anything, people who do not produce any wealth at all, they just move money from one person to another. But traders play a very important function in the economy, as they provide liquidity and they provide ways for industries to operate where they otherwise wouldn't be able to. I'm not saying traders are saints by any means, they're like banks and bankers. They don't have the greatest reputation, but the economy can't function without them.

 

[chiro]

I can tolerate a person trading with a computer or a computer trading with a person but computers trading stocks with computers? That seems incredibly and obviously wrong to me or am I missing something here?

Never mind my philosophical objections, I think it's just plain dangerous. If computers are trading with computers than they are all presumably using different proprietary algorithms. I would say that the algorithms, because they are different, will inevitably clash and have a cascade effect, possibly causing a market crash. The one day major spike down a little while ago was attributed to that by some but I guess the blame was shifted elsewhere.

All it could take is for some selling to trigger another algorithms quirk, bad code or just difference and more selling and for it to cascade and you have a quick crash. If that happens guess who gets screwed? The infinitely slower human traders.

One thing I have observed is that if people can do something, they will.

 

[Office_Shredder]

Whatever happened to strategic investing, picking good companies, and riding out the highs and lows?

How is this any more "investing" in the US? In neither case are you handing over money to a company so that they can expand.

 

[lisab]

How is this any more "investing" in the US? In neither case are you handing over money to a company so that they can expand.

Well it can be investing, if you put money in IPOs. But you make a really good point, and one that I've never really understood: after the IPO, what is the advantage for a company to be publicly owned? It seems more trouble than it's worth. The system puts a strong emphasis on quarterly earnings, not long-term prospects.

n.b. I'm a total stock market noob .

 

[moejoe15]

One thing I have observed is that if people can do something, they will.

Yes, one of our greatest virtues. Also one of our greatest faults.

 

[MarcoD]

Yes, one of our greatest virtues. Also one of our greatest faults.

The irrational fear that you'll jump off a bridge when you cross it?

 

[WhoWee]

Well it can be investing, if you put money in IPOs. But you make a really good point, and one that I've never really understood: after the IPO, what is the advantage for a company to be publicly owned? It seems more trouble than it's worth. The system puts a strong emphasis on quarterly earnings, not long-term prospects.

n.b. I'm a total stock market noob .

The share can be used instead of cash - compensate for services, to acquire other companies, etc. Also, unlike a debt instrument, the company is not obligated to pay a return.

 

[CAC1001]

Well it can be investing, if you put money in IPOs. But you make a really good point, and one that I've never really understood: after the IPO, what is the advantage for a company to be publicly owned? It seems more trouble than it's worth. The system puts a strong emphasis on quarterly earnings, not long-term prospects.

n.b. I'm a total stock market noob .

There's lots of reasons to go public. In addition to what WhoWee said, going public is a way to raise lots of capital for growth and expansion that the company may not have access to otherwise. It also can increase the company's value because it makes the company into a liquid asset, which the owners of the firm may want. You might own a company that makes say $500 million in revenue and is profitable, but the company may be valued at around $400 million, because it isn't a liquid asset. You can't convert the wealth that is the value of the company into liquid cash very quickly, unless you could sell the company off really fast.

Whereas if you take it public, now the company may make the same revenue, but be valued more highly, because it is a much more liquid asset. This is what many were doing at the height of the tech bubble in the late 1990s: they'd set up a website, form a "company," get venture capital (it was all "New Economy" which supposeldy meant that the old traditional aspects of business didn't apply anymore, so no one was paying attention to whether these "companies" actually were creating any real value), take the "company" public, and then cash out their shares. Although that was a bubble, and it crashed, but that's the idea.

So going public let's the owners diversify their wealth if they wish and it also increases their wealth if the company increases in value enough. It also brings media attention to the company. The downsides of course are lots of new regulations, obsessive focus on the quarterly share price, and so forth. If you are one of the corporate executives, whereas before, when private, if asked, you could say to friends or family whether business was good or bad or whatnot, now you can't say anything, as that would be divulging information that could lead to insider trading.

What also can happen I have read is you could have run the business for years let's say, as a private company. You know all about the business, how to run it fine, you have lots of experience, etc...then you go public, and now all-of-a-sudden, you, the person who has run the firm for years is being told by a twenty-something stock analyst fresh out of business school who has never run anything whether or not you are doing a good or bad job