This story was funny. High-frequency traders stuff the market with quotes. Someone drew a chart of quote changes. There are amusing patterns.
The high-frequency traders flood the market with quotes. They change the quote by a penny. They change the quantity. They move back and forth 1k+ times per second.
How does this lead to profit? They may fool poorly-written algorithms.
By flooding the market with quotes, they may slow the server at a stock exchange or trader. If you have a slower connection or a poorly-written algorithm, the large volumes of quotes will hurt your program.
A quote doesn't cost nothing. Everyone must spend computing power processing each quote. Some high-frequency traders are publishing quotes in excess of computing power.
Right now, exchanges charge $0 per quote. To discourage high-frequency trading quote abuse, exchanges could start charging a millionth of a penny per quote. This would only deter people abusing high frequency quoting.
The fee could only be charged if your quote-to-trade ratio exceeds 1k or 10k, so serious traders and market makers would not be affected.
What useful work do high-frequency traders do? None. It's only "useful" in the context of a corrupt market. If the rest of society were interviewing the financial industry for a job, the banksters would not be hired. The State enables banksters and traders to earn high profits, without doing any useful work.
Wednesday, October 27, 2010
Market Crop Circles And Pay-Per-Quote
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6 comments:
I know you don't like taxes, but I they should try a small transaction fee on all trades. This would really calm the automated computer trading nonsense. Spend the money on european style socialism, high speed rail, something cool we could really use. US citizens don't get much back in return for the taxes they pay, unlike the europeans.
There already are transaction fees and taxes.
There is currently no quoting fee. You exactly missed my point.
I know what your point was on quotes. I was extending the idea in a new area. There have been a lot of articles on this. If there's a fee now it must be trivial. All these scams can be suppressed.
http://open.salon.com/blog/old_new_lefty/2010/05/12/things_you_may_not_know_about_the_economy
http://www.financialpolicy.org/DSCPrimerTT.htm
http://en.wikipedia.org/wiki/Tobin_Tax
The wonderful thing about free markets is that honest people can just leave any exchange that is corrupt and go to well run market.
This is why it's so great that there are no regulations on financial instruments and new exchanges replace the old corrupt ones monthly.
I think you both are missing the point. This whole system wasn't built to facilitate trade. The laws of the system wasn't written to facilitate justice.
It all was created to insure the easy profit of an insider. If one presumes such a purpose, then one can expect to observe laws, rules and systems not working right at where the insiders are.
And this is exactly what we are observing.
Therefore, to suggest helpful changes means you don't understand the purpose behind existing system..
I've mentioned in plenty of places that the financial system is one big scam.
Sometimes, I make posts under the assumption of "If it isn't a scam, this is what they should do." Obviously, collapse is much more likely than reform.
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