Most U.S. Stock Trades Are Made by Computers, Not People: Is “High Frequency Trading” Manipulating the Stock Market?

By on October 11, 2010 in News 16

The Crime of Our TimeI came across this topic while working on the Disinformation-published The Crime Of Our Time, written by Plunder filmmaker Danny Schechter. To me, this is one of those topics, the media should be more concerned about, (60 Minutes did report on this last night), but I wonder if the fear of massive manipulation destroying confidence in the entire system is causing many to look the other way. 60 Minutes reports:

It may surprise you to learn that most of the stock trades in the U.S. are no longer being made by human beings, but by robot computers capable of buying and selling thousands of different securities in the time it takes you to blink an eye. These supercomputers — which actually decide which stocks to buy and sell — are operating on highly secret instructions programmed into them by math wizards who may or may not know anything about the value of the companies that are being traded.

It’s known as “high frequency trading,” a phenomenon that’s swept over much of Wall Street in the past few years and played a supporting role in the mini market crash last spring that saw the Dow Jones Industrial Average plunge 600 points in 15 minutes. Most people outside of the industry know very little, if anything, about it. But the Securities and Exchange Commission and members of Congress have begun asking some tough questions about its usefulness, potential dangers, and suspicions that some people may be using computers to manipulate the market.

, , , , , , , , , ,

  • Liam_McGonagle

    This is a problem really only to the extent it reinforces crappy pricing models. See, this is just rope-a-dope execution software. No special judgment calls here. One of the few parts of the process that have no discernable human value add.

    The real problem, in my opinion, is much further upstream–the assumptions that get baked into the bullshit pricing models. Basically, since about 1970, a school of egghead dreamers took the deeply flawed Laissez Faire economic theory, slapped a kabbalistic phantasy shell of make-believe mathematics around it and produced the Quantitative school of investment analysis.

    http://en.wikipedia.org/wiki/Quantitative_analyst

    I don’t entirely blame those eariest quants, though. It’s possible that they never imagined the revolution that would occur in our society’s computational capacity or the implications of that for their naive inquiries.

    And if anything, what this episode really shows is just how far course we go when we lose perspective and respect for the proper place of mysticism and speculation in society. If the bishops, elders, rabbis and mullahs had been better stewards of their spiritual traditions, maybe the patent unsuitability of this quant nonsense as a domninant market paradigm would have been apparent to us early on.

    So, in my opinion, it’s an appealing idea that the problem can be blamed on computers, but in reality the problem is the too-small limits of our imaginations and the too-large demand of our greed.

    • ralph

      Hey Liam, I don’t intend to place the blame on the computers or the technology itself, it’s more so to call into question the mythology about the stock market that it’s about “long-term” investment and exists to provide opportunities for businesses to raise capital to grow.In this clip above, the traders say themselves the only purpose for these activities is to make money. 90 percent of these transactions are canceled, which only reinforces the sentiment this is not about “investment” or for the good of anyone other than the speculators themselves.We all can debate as to whether people have a right to engage in these activities, but I think people who were told to put their retirement funds into this grand casino, and even still after the economic meltdown are continuing to be told to do so by countless “financial managers” and influential television pundits, need to realize what they are getting into.

      • Liam_McGonagle

        Fair play. Maybe just my contrarian streak showing through.

        Cause it’s fairly clear that I agree with your basic underlying premise. I guess I’m just personally struggling to find a successful rhetorical strategy to get the political traction necessary to get this bitch back under control. And my current thinking is “the more personal, the better”.

        If the Tea Party has done one thing correctly, it’s that it communicates at the least abstract level possible. Sure, that’s not exactly conducive to dispasionate, objective inquiry, but it does get people on the streets. And, no offense, but I think framing the discussion around computerization doesn’t quite acheive that.

        Now that you’ve gotten me to reconsider my comment, I see that my counter-forumlation is, if anything, even less effective. In fact, my effort is much worse. I go wider, more abstract, not less.

        Maybe the way to pitch this thing is “Joe Kennedy on steroids”. Roosevelt named him first SEC commissioner because that scumbag was infamous for doing just this sort of thing–floating phony trades or at least rumours of them. Joe Kennedy invented all the tricks; at best all these kids can do is come up with some warmed over variation.

        And I see no reason why these guys can’t be prosecuted. Kennedy saw to it that regulation was put into place to prevent people from making money in precisely this way, be it out of hypocrisy or repentance.

        • Hypnos1

          “And I see no reason why these guys can’t be prosecuted.”

          Exactly it. But the punishments must be much harsher. Politicians can invent a thousand ways to limit financial fraud, but the people who make themselves filthy rich committing that fraud will find 1,001. As long as their punishments are laughable fines or a few months in low security “prisons” they will continue to find ways to stretch and break the law, or just re-write it in the next legislative cycle.

          • Other Mr. T

            have you read ?
            http://www.zerohedge.com/article/day-market-almost-died-courtesy-high-frequency-trading

            Here are 3 simple “collective punishments”, since at this point the recklessness has become obviously collusive.
            1. No “cancel orders” for high frequency automated trades allowed at all.
            2. No high volume automated trades for 1 hour at the start of the trade day.
            3. “Speed limit” on frequency of automated trades on each chair / desk id for last hour of the trade day.

            I am not sure, if it will turn predatory market making into trading liquidity heaven, to be honest.
            Fines or jail doesn’t really change the “rules” of the game. Making risk even more risky will (after several more flash crashes or one great big bloodbath). Here’s a quote from Paul Craig Roberts with a lovely analogy on morality of risk taking:
            Alas, the collapse of morality is too widespread. Some sports teams now have a win-at-all-cost attitude that involves plans to injure the star players of the opposing teams. To avoid all these controversies, let’s go to Formula One racing where 200 mph speeds are routine.

            Prior to 1988, 22 years ago, track deaths were due to driver error, car failure, and poorly designed tracks compromised with safety hazards. World Champion Jackie Stewart did much to improve the safety of tracks, both for drivers and spectators. But in 1988 everything changed. Top driver Ayrton Senna nudged another top driver Alain Prost toward a pit wall at 190 mph. According to AutoWeek (August 30, 2010), nothing like this had been seen before. “Officials did not punish Senna’s move that day in Portugal, and so a significant shift in racing began.” What the great racing driver Stirling Moss called “dirty driving” became the norm.

            Nigel Roebuck in AutoWeek reports that in 1996 World Champion Damon Hill said that Senna’s win-at-all-cost tactic “was responsible for fundamental change in the ethics of the sport.” Drivers began using “terrorist tactics on the track.” Damon Hill said that “the views that I’d gleaned from being around my dad [twice world champion Graham Hill] and people like him, I soon had to abandon,” because you realized that no penalty was forthcoming against the guy who tried to kill you in order that he could win.

            When asked about the ethics of modern Formula One racing, American World Champion Phil Hill said: “Doing that sort of stuff in my day was just unthinkable. For one thing, we believed certain tactics were unacceptable.”

            In today’s Western moral climate, driving another talented driver into the wall at 200 mph is just part of winning. Michael Schumacher, born in January 1969, is a seven times World Champion, an unequaled record. On August 1 at the Hungarian Grand Prix, AutoWeek Reports that Schumacher tried to drive his former Ferrari teammate, Rubens Barrichello, into the wall at 200 mph speeds.

            Confronted with his attempted act of murder, Schumacher said: “This is Formula One. Everyone knows I don’t give presents.”

          • Liam_McGonagle

            Okay, I like this. This is good. This is movement towards a practical solution. It’s a policy formulation. More like this, please . . .

            “Here are 3 simple “collective punishments”, since at this point the recklessness has become obviously collusive.
            1. No “cancel orders” for high frequency automated trades allowed at all.
            2. No high volume automated trades for 1 hour at the start of the trade day.
            3. “Speed limit” on frequency of automated trades on each chair / desk id for last hour of the trade day. ”

        • ralph

          Like the adage “All politics is local” I agree, this issue must be made personal for people. The cognitive dissonance of the American public is astounding … if you were mugged on the street, you’d take that personally, but if your 401k or life savings gets depleted, then I don’t know why the millions who were affected weren’t as outraged as if they were mugged.My message to these Wall Streeters is just because you wear a suit to work and work in an office on Wall Street, instead of “working” as a petty thief on the street outside those fancy skyscrapers, does not make you less of a criminal if you are engaged in this sort of chicanery.

          • Liam_McGonagle

            I wonder if you have hit the core idea right there: frame the issue as one of common criminality.

            Clearly I have a lot to learn about rhetorical effectiveness myself, but I do think there is a general consensus that progressives have a common ‘debility’ in the articulation of their thesis: Love of the fact.

            Maybe we love the analytical process itself so much, and have atypically high abilities to abstract, that we get lost in the construction of tight logical argument and almost totally forget that we aren’t talking to people just like us, people who love to reason.

            A while ago I read a book called ‘Made to Stick: Why Some Ideas Survive and Others Die”.

            http://www.madetostick.com

            It’s not directed at polemics or current events analysis per se, but from it I took to big points that I’m still struggling to incorporate in my own writing:

            1. The thing people hate most is decision paralysis. Having too many or unclear choices or no obviously superior choice presented to people makes them anxious and likely to ignore a message. No matter how urgent that message might be.

            2. Successful ideas are human-scale, non-abstract. So in the case of the mind-boggling numbers Wall Streeters use, I think we are morally justified in boiling down the rhetoric to comparisons with street thuggery. People need to emotionally engage with ideas at the most primal existential level possible.

            I know that’s gonna be a problem for a lot of progressive journalists / commentators because it may give off a superficial wiff of the FoxNews yellow journalism that they’ve come to hate. But facts are facts: rhetorical effectiveness is clearly the one thing that Fox does RIGHT.

            But let’s not create a false sense of equivalence here: Progressives have the correct facts. Until now they just haven’t had the correct rhetoric.

            I think that the way they may come in time to develop that correct rhetoric is a two-tier communications structure, whether intentially set up as such, or de facto as individual savvy rhetoricians with the analytical ability gel the two disciplines together. One primary tier to analytically examine facts and propose solutions; the other to boil down the arguments to their most essential core in order to fuel popular momentum.

  • Anonymous

    This is a problem really only to the extent it reinforces crappy pricing models. See, this is just rope-a-dope execution software. No special judgment calls here. One of the few parts of the process that have no discernable human value add.

    The real problem, in my opinion, is much further upstream–the assumptions that get baked into the bullshit pricing models. Basically, since about 1970, a school of egghead dreamers took the deeply flawed Laissez Faire economic theory, slapped a kabbalistic phantasy shell of make-believe mathematics around it and produced the Quantitative school of investment analysis.

    http://en.wikipedia.org/wiki/Quantitative_analyst

    I don’t entirely blame those eariest quants, though. It’s possible that they never imagined the revolution that would occur in our society’s computational capacity or the implications of that for their naive inquiries.

    And if anything, what this episode really shows is just how far course we go when we lose perspective and respect for the proper place of mysticism and speculation in society. If the bishops, elders, rabbis and mullahs had been better stewards of their spiritual traditions, maybe the patent unsuitability of this quant nonsense as a domninant market paradigm would have been apparent to us early on.

    So, in my opinion, it’s an appealing idea that the problem can be blamed on computers, but in reality the problem is the too-small limits of our imaginations and the too-large demand of our greed.

  • http://disinfo.com ralph

    Hey Liam, I don’t intend to place the blame on the computers or the technology itself, it’s more so to call into question the mythology about the stock market that it’s about “long-term” investment and exists to provide opportunities for businesses to raise capital to grow.In this clip above, the traders say themselves the only purpose for these activities is to make money. 90 percent of these transactions are canceled, which only reinforces the sentiment this is not about “investment” or for the good of anyone other than the speculators themselves.We all can debate as to whether people have a right to engage in these activities, but I think people who were told to put their retirement funds into this grand casino, and even still after the economic meltdown are continuing to be told to do so by countless “financial managers” and influential television pundits, need to realize what they are getting into.

  • Liam_McGonagle

    Fair play. Maybe just my contrarian streak showing through.

    Cause it’s fairly clear that I agree with your basic underlying premise. I guess I’m just personally struggling to find a successful rhetorical strategy to get the political traction necessary to get this bitch back under control. And my current thinking is “the more personal, the better”.

    If the Tea Party has done one thing correctly, it’s that it communicates at the least abstract level possible. Sure, that’s not exactly conducive to dispasionate, objective inquiry, but it does get people on the streets. And, no offense, but I think framing the discussion around computerization doesn’t quite acheive that.

    Now that you’ve gotten me to reconsider my comment, I see that my counter-forumlation is, if anything, even less effective. In fact, my effort is much worse. I go wider, more abstract, not less.

    Maybe the way to pitch this thing is “Joe Kennedy on steroids”. Roosevelt named him first SEC commissioner because that scumbag was infamous for doing just this sort of thing–floating phony trades or at least rumours of them. Joe Kennedy invented all the tricks; at best all these kids can do is come up with some warmed over variation.

    And I see no reason why these guys can’t be prosecuted. Kennedy saw to it that regulation was put into place to prevent people from making money in precisely this way, be it out of hypocrisy or repentance.

  • Hypnos1

    “And I see no reason why these guys can’t be prosecuted.”

    Exactly it. But the punishments must be much harsher. Politicians can invent a thousand ways to limit financial fraud, but the people who make themselves filthy rich committing that fraud will find 1,001. As long as their punishments are laughable fines or a few months in low security “prisons” they will continue to find ways to stretch and break the law, or just re-write it in the next legislative cycle.

  • Other Mr. T

    have you read ?
    http://www.zerohedge.com/article/day-market-almost-died-courtesy-high-frequency-trading

    Here are 3 simple “collective punishments”, since at this point the recklessness has become obviously collusive.
    1. No “cancel orders” for high frequency automated trades allowed at all.
    2. No high volume automated trades for 1 hour at the start of the trade day.
    3. “Speed limit” on frequency of automated trades on each chair / desk id for last hour of the trade day.

    I am not sure, if it will turn predatory market making into trading liquidity heaven, to be honest.
    Fines or jail doesn’t really change the “rules” of the game. Making risk even more risky will (after several more flash crashes or one great big bloodbath). Here’s a quote from Paul Craig Roberts with a lovely analogy on morality of risk taking:
    Alas, the collapse of morality is too widespread. Some sports teams now have a win-at-all-cost attitude that involves plans to injure the star players of the opposing teams. To avoid all these controversies, let’s go to Formula One racing where 200 mph speeds are routine.

    Prior to 1988, 22 years ago, track deaths were due to driver error, car failure, and poorly designed tracks compromised with safety hazards. World Champion Jackie Stewart did much to improve the safety of tracks, both for drivers and spectators. But in 1988 everything changed. Top driver Ayrton Senna nudged another top driver Alain Prost toward a pit wall at 190 mph. According to AutoWeek (August 30, 2010), nothing like this had been seen before. “Officials did not punish Senna’s move that day in Portugal, and so a significant shift in racing began.” What the great racing driver Stirling Moss called “dirty driving” became the norm.

    Nigel Roebuck in AutoWeek reports that in 1996 World Champion Damon Hill said that Senna’s win-at-all-cost tactic “was responsible for fundamental change in the ethics of the sport.” Drivers began using “terrorist tactics on the track.” Damon Hill said that “the views that I’d gleaned from being around my dad [twice world champion Graham Hill] and people like him, I soon had to abandon,” because you realized that no penalty was forthcoming against the guy who tried to kill you in order that he could win.

    When asked about the ethics of modern Formula One racing, American World Champion Phil Hill said: “Doing that sort of stuff in my day was just unthinkable. For one thing, we believed certain tactics were unacceptable.”

    In today’s Western moral climate, driving another talented driver into the wall at 200 mph is just part of winning. Michael Schumacher, born in January 1969, is a seven times World Champion, an unequaled record. On August 1 at the Hungarian Grand Prix, AutoWeek Reports that Schumacher tried to drive his former Ferrari teammate, Rubens Barrichello, into the wall at 200 mph speeds.

    Confronted with his attempted act of murder, Schumacher said: “This is Formula One. Everyone knows I don’t give presents.”

  • Liam_McGonagle

    Okay, I like this. This is good. This is movement towards a practical solution. It’s a policy formulation. More like this, please . . .

    “Here are 3 simple “collective punishments”, since at this point the recklessness has become obviously collusive.
    1. No “cancel orders” for high frequency automated trades allowed at all.
    2. No high volume automated trades for 1 hour at the start of the trade day.
    3. “Speed limit” on frequency of automated trades on each chair / desk id for last hour of the trade day. ”

  • http://disinfo.com ralph

    Like the adage “All politics is local” I agree, this issue must be made personal for people. The cognitive dissonance of the American public is astounding … if you were mugged on the street, you’d take that personally, but if your 401k or life savings gets depleted, then I don’t know why the millions who were affected weren’t as outraged as if they were mugged.My message to these Wall Streeters is just because you wear a suit to work and work in an office on Wall Street, instead of “working” as a petty thief on the street outside those fancy skyscrapers, does not make you less of a criminal if you are engaged in this sort of chicanery.

  • Anonymous

    I wonder if you have hit the core idea right there: frame the issue as one of common criminality.

    Clearly I have a lot to learn about rhetorical effectiveness myself, but I do think there is a general consensus that progressives have a common ‘debility’ in the articulation of their thesis: Love of the fact.

    Maybe we love the analytical process itself so much, and have atypically high abilities to abstract, that we get lost in the construction of tight logical argument and almost totally forget that we aren’t talking to people just like us, people who love to reason.

    A while ago I read a book called ‘Made to Stick: Why Some Ideas Survive and Others Die”.

    http://www.madetostick.com

    It’s not directed at polemics or current events analysis per se, but from it I took to big points that I’m still struggling to incorporate in my own writing:

    1. The thing people hate most is decision paralysis. Having too many or unclear choices or no obviously superior choice presented to people makes them anxious and likely to ignore a message. No matter how urgent that message might be.

    2. Successful ideas are human-scale, non-abstract. So in the case of the mind-boggling numbers Wall Streeters use, I think we are morally justified in boiling down the rhetoric to comparisons with street thuggery. People need to emotionally engage with ideas at the most primal existential level possible.

    I know that’s gonna be a problem for a lot of progressive journalists / commentators because it may give off a superficial wiff of the FoxNews yellow journalism that they’ve come to hate. But facts are facts: rhetorical effectiveness is clearly the one thing that Fox does RIGHT.

    But let’s not create a false sense of equivalence here: Progressives have the correct facts. Until now they just haven’t had the correct rhetoric.

    I think that the way they may come in time to develop that correct rhetoric is a two-tier communications structure, whether intentially set up as such, or de facto as individual savvy rhetoricians with the analytical ability gel the two disciplines together. One primary tier to analytically examine facts and propose solutions; the other to boil down the arguments to their most essential core in order to fuel popular momentum.