Michael Hudson is a highly-regarded economist. He is a Distinguished Research Professor at the University of Missouri, Kansas City, who has advised the U.S., Canadian, Mexican and Latvian governments as well as the United Nations Institute for Training and Research. He is a former Wall Street economist at Chase Manhattan Bank who also helped establish the world’s first sovereign debt fund.
Yesterday, Hudson said:
Take any stock in the United States. The average time in which you hold a stock is–it’s gone up from 20 seconds to 22 seconds in the last year. Most trades are computerized. Most trades are short-term. The average foreign currency investment lasts–it’s up now to 30 seconds, up from 28 seconds last month.
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I see no reason for the minimum to be less than twenty four hours.
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less than twenty four hours.
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~~Sal~
You bet. Although the auction does not set the price, it merely reveals the consensus of the price. Sin embargo, it is a rare moment that the price changes every 15 seconds.
Tell me something! Who makes more money? Computerized trader on Wall Street or famous investor from Omaha? Does famous investor capitalize on agonizingly slow changes in price? Day trader try to capitalize on instantaneous frenzy of other traders and proprietary traders? Who wins every time? New Yorker or corn-husker on the Platte River? Who creates social value by identifying deep underlying value of capital goods? Who burns up resources for selfish anti-social psychopathic buzz-on?
Can better rules of the road slow down the inefficiency of rapid trade? You need to devise rules that are easy to define and easy to enforce. For example — 7X24 trading only by limit-orders to keep auction rates clearly visible at all times. Plus for 11 minutes each day day-trader market orders with no-holds-barred. 11 minutes should be quite enough, quite enough to see who is operating on inside information but who is hammering the tick with someone else’s liquidity.
You get the picture?
Get it
!
So, what exactly does this have to do with investing in a company? What economic purpose in the real productive economy does this nonsense serve? Why should we even allow it?
The purpose it serves is liquidity. It ensures efficient and liquid functioning capital markets.
Its called market making, get a clue and stop fueling the populace ignorance.
A trader sees 10 buyers looking for 1000 share lots of Apple stock… simultaneously he sees 1 seller looking to sell 10,000 shares of Apple stock. Since there are very fewer buyers of large lots, and the trader has the capital to execute a larger trade and the ability to “make markets” he buys the 10,000 shares from the seller, and carves it up into 10, 1000 share lots and sells it to each of the buyers. For this he makes a spread (profit). Since its harder to sell 10,000 shares, that seller sells the stock for $315 trying to motivate a buyer. Since 1000 share buyers cant get that price, the trader is capable of selling it at $315.50 per share… generating a profit. Thats the same thing BJs and McDonalds and Sports Authority do.
Profit, sirs, is the purpose of capitalism. If you don’t like it, go to China. Oh wait, they are capitalist as well. Go to Cuba or Iran and participate in their thriving society.
The fact that you see a lot of market making and liquidity has nothing to do with gambling. Why don’t YOU stop confusing the two? Profit through trading pieces of paper has nothing to do with capitalism, especially when it’s done in 20 seconds or less.
Although, I’m no fan of trading as an economic activity. But, If you start demanding that all economic activities support a healthy society we would have no economy and then there’s the issue of who gets to pick the metric of social utility. GDP, as a measure, leaves a great deal to be desired.
That being said, the real problem I have with trading is not that it has marginal social utility. i.e. When things seize up, trading actually ensures there is no price discovery and refuses to make a market when it is most needed. The real danger of trading, as it is currently designed and allowed to exist, is that in good times, it strips economic value and denigrates the rest of the economy, rent seeking etc. And in bad times, it lays waste to all of us due to its pernicious leverage and gaming of legitimate economic activity. Trading, if properly regulated, could be made less destructive but the finance industry would never accept lower profits. So it goes.
Liquidity? I suppose. Market making? These traders are not market making.
If they turn off their computers (which they have done) there is a severe drop in liquidity as per the flash crash.
Market making means taking the bids and offers when nobody else will. And no one has the capital to do that.
That’s not how it works with HFT and algorithms. There’s lots of churning, i.e. unnecessary buying and selling. It simulates interest in stocks when in reality there is none or much less.
I used to think of high frequency trading as just a modern version of the program trading that’s been going on since the 1980’s. Much of it is, but much of it is not. Look up “quote stuffing”, “strange sequences”, and “flash trading”. Much of this is just plain market manipulation and front-running.
bravo, forgot to mention this
@MH, Sir or Madam, you logic has an error:
market making involves 1 (one) additional trading step. Thus the amount of trades needed doubles from 1 (one) needed if participants deal directely, to 2 (two) when they trade via a proxy ( the market maker).
If the market maker holds the stock for a very short time (approching zero), the average holding time of a stock is half of the holding time of the investor (due to the doubeling of trading steps).
With the numbers mentioned here this makes it 44 sec. on average. I think all ivestment times below some weeks are a sign of pecualtion rather than investing.
best regards,
ralf
MH-
Perhaps that’s the answer that’s typically given by Wall Street boosters, but that’s not the real reason why high frequency trading occurs. First, to address your points:
1) Market making. The purpose of market makers is indeed to ensure smooth functioning of markets. HFT is the exact opposite. It thrives on volatility which is the only way to extract profits in micro-second trades.
Furthermore, market makers in exchanges such as the NYSE are contractually obligated to actually maintain a market in their stocks (i.e. maintain a bid and offer even in the face of asymmetric pressures). In return, they’re allowed to profit from the spread.
High frequency traders, as we have seen during flash crashes of the past year, withdraw their liquidity precisely when market makers would be forced to step in. As such, their activities don’t constitute market making.
2) As for your example, I believe the act of splitting a 10,000 sell order to 10×1000 buy orders is the service of a broker, not a market maker. After all, according to your example, there already is a market for the shares (there’s a seller and multiple buyers). The broker on the sell side can partially fill the 10,000 sell order, selling smaller lots until the entire position is sold. While this may end up costing the seller multiple transaction fees, it does not in and of itself demand a higher spread.
It’s the volume in total that determines the overall liquidity of the market and the resulting spread. Repacking a specific order into multiple orders doesn’t itself constitute any great challenge to a modern exchange or broker nor does it require the services of an HFT.
3) More generally, I think you’ve forgotten the overall purpose of public companies and stock exchanges: the corporation, the stock exchange, and indeed the entire financial industry is supposed to facilitate the connection between those who have capital and wish to invest it, and those who need capital for productive use. Whatever profit the financial industry makes supporting this primary activity is essentially economic friction (the conversion of useful energy to waste heat). I fail to see how holding a stock for 22 seconds in any way promotes the original purpose of the financial industry and is nothing more than a method of siphoning off pennies from the real buyers and sellers of the stock.
4) As for your praises of capitalism, it’s not capitalism nor profits that worry me; it’s the inevitable socialized losses that the general public will be forced to bear when HFT proves to be nothing more than another scam in the long list of scams perpetrated in the name of capitalism and profit.
MH said: “Its called market making, get a clue and stop fueling the populace ignorance…….Profit, sirs, is the purpose of capitalism. If you don’t like it, go to China.”
You Wall Street oligarch-monkeys must all come off the same assembly line: “Profit, sirs, is the purpose of capitalism. If you don’t like it, then go to Cuba, etc.”
For you Wall Street cheerleaders the destruction of the middle-class to enrich the billionaire class is just another event to prove that you corporate ass lickers belong inside the plantation and not out there in the cotton fields with the of us parasites.
“Abhorrent” is a word that comes to mind, in describing people like you.
“Profit, sirs, is the purpose of capitalism. If you don’t like it, go to China.”
The purpose of capitalism, *sir*, is so the the Walton family alone, heirs to the Wal-Mart fortune, can get to have a net worth that is more than the bottom 100 million Americans’ wealth combined.
To give only one example of the *extreme* inequality that you probably think is just wonderful.
If that doesn’t make us a banana republic, *sir*, then what would do it for your corporate hack mind, you Wall Street shill.
If you could repeat this behavior, profitably, with a commodity-based currency rather than a fiat one- I might join your team. As things stand, I can on regard the current computerized arbitrage process as a tax-payer funded bait and switch.
I believe it is the “populists” you have been instructed to attack, not the “populace”.
Okey dokey, then.
Looks like EMH has been upgraded to the new, 22-second version. So can maybe theSuperDuperUberIncrediblyAwesomelyEpicallyEfficient Market Hypothesis would be more apt?
See also, Wikipedia: Efficient Market Hypothesis: In finance, the efficient-market hypothesis (EMH) asserts that financial markets are “informationally efficient”…
So, does this mean all the traders are now chasing down Adderall with shots of tequila, to help them all think faster? ‘Cause those markets are like, y’know, **awesomely** efficient to function in 22 second trades.
Wheeeeeeeeeee!
Or, as the term around here seems to be: mirabile dictu!
May we please have a transaction tax? Preferably with rates inversely proportional to the hold time on a LIFO basis?
*liked*
I like the way you think.
Since buying a share of stock is dependent on a whole raft of social goods, stable money, law enforcement, transportation, communication, etc., it’s only reasonable to recover some of the social cost. Not a big nick, but it would add up.
How about another idea: the original rationale behind the graduated income tax was that every dollar above a certain amount didn’t improve life, it was excess and wouldn’t be missed. There’s probably a maximum number of transactions after which the stockbroker’s just churning and doing no good. If they’re really just parking M1 as M3, the way the liquidity school claims. A small social cost tax until the volume gets crazy. How much? About as much as an HFT program does in a morning.
Transaction tax is the only way to cool high frequency or excessive trading and ensure some small bit of sanity into trading. But then it wouldn’t be trading, it’d be more like investing. People who like to invest have some interest in actual economic activity. I suspect most traders care about economic activity to the extent that it can affect the next infinitesimal move in a position.
Sir, please, what are all the little stock manipulators going to do if you put on a small transaction tax?
It will mean the end of HFT and western civilization! :^)
FYI, “Mirabile Dictu” , which keeps coming up here, is the supine form in Latin Grammar, and really just an archaic infinitive, as if Latin were not already archaic enough. While we are onto Latin, check out Horace’s Odes and Epodes. He wrote about the virtues of the simple life, a farmhouse in Tuscany, as opposed to the particle board palaces of the age. Sure, such a farmhouse would cost millions today, but, you can get credible farmland in Alabama for $500 an acre. The locals are in need of a good dentist, but, are nice people. However, I wonder if the only reason they stopped the lynchings is because of the livelihood to be made in the prison industry. No sense killing your golden goose. Real farmers probably have much use for the government-military –prison- casino industrial complex, and aren’t the ones keeping the Wall Mart and fried chicken shacks in business. My advice, if you can, find a rural town without prisons, casinos, or military bases, and live like Horace advised, if not in the US, then, in Latin America.
I meant that farmers don’t have much use for the competing economic system funded by the prison-military base industry, which mars far too much of the rural landscape in the US.
Here’s an astute description of what some of these HFT shops are doing, written by someone on the buy side:
“Sub-pennying is just a new version of front-running. Say there are bids at 20 and offers at 20.05. Seller gets tired of waiting for 20.05 and decides to hit the bid at 20.00 with his 1000 share sell. His order actually executes at 20.0001. Seller makes an extra dime on his $20k transaction. Price improvement! Don’t spend it all in one place, big guy.
What happened? A algo saw the order coming and jumped in front of all the 20.00 bids by offering an extra 1/100th of a penny (sub-pennying). He then waits for a buyer who’s willing to hit the offer at 20.05 and jumps in front of the line with a 20.0499 offer. He makes the 0.0498 spread ($49.80 on a 1000 share order, minus transaction fees).
So what’s the problem? Seller got an extra dime and the guy who bought at 20.0499 saved a dime. Everyone comes out ahead! The algo earned his 49.80 fair and square by providing liquidity and taking on risk, right? Well, no. The algo depends on multiple bids at 20.00 to run his scheme. If it sees those bids drying up it will forget about the 49.80 potential profit and accept a 10 cent loss by hitting the the remaining 20.00 bids before they disappear entirely. The algo was never really at risk, beyond that meaningless dime. The algo did not really provide liquidity, it merely stepped in front of the true liquidity providers.”
Presumably “average” is a completely meaningless concept in this instance. Much HFT is probably held for much less, and all ‘proper’ investments held for much MUCH longer.
There is a nice chapter in Ha-Joon Chang’s newest, 23 Things They Don’t Tell You About Capitalism, called “Financial markets need to become less, not more, efficient”. I would really like to see the book reviewed here.
My late boss always cautioned about the use of averages, pointing out the need to look also at the range of the values. To illustrate, he noted that the “average” American (or other nationality) has one tit and one ball: accurate statistically but not descriptively.