Whining algo traders

[Tad Borek]

So politicians and regulators are falling over themselves to blather about the necessity of changes to trading rules, to bring order to the markets. In my mind behind every one of those statements is a paid lobbyist, and I'm fingering whining algo traders as the ones who might be signing the checks on this one.

Now correct me if I'm wrong but the main losers on Thursday were the firms that willingly created systems that send buy and sell orders to the market without human intervention. Whether simply an unmanaged stop-loss or an algo trading platform that churns out trading profits day in and day out, mostly. They lost because of something they didn't think of and plan into their systems. There is no requirement to trade this way, it's a voluntary choice by an investor, speculator, bank, etc.

If their algorithms are subject to market storms, why is that a problem deserving of regulatory intervention? Who cares if one of the "mega hedge firms" said to dominate flash trading, and trading volume, goes belly-up? Aren't they big boys & girls who are themselves exploiting a market, extracting rents for providing liquidity, and taking on the risk that they haven't quite figured that market out?

And wasn't there a winner on the other side of each of those trades? Didn't the market rebound when live humans (like me) started shoveling in cash...isn't that how markets work, all the time, getting out of balance and then back into temporary equilibrium again?

I say forget the circuit breaker changes and let a few algo traders go kaplooey. That would be the free-market approach, no? It seems a positive outcome to encourage a return to managed orders, instead of trading dominated by systems designed by 20-something quants, duking it out every millisecond for fractions of a cent. Until "something they didn't think of" happens - the Long-term Capital Management issue - heck the driver behind a lot of blow-ups. Regulations won't stop that as well as "losing a big pile of money" would. No?

-Tad

trading by real humans, since 1999

[Bradly T.]

Must agree, few humans intervened or up-corrected with market buy ins Thursday....move up was as fast as down. The machines moved market both directions by preprogrammed rapid-response trading - regardless of original trigger source or action. If you weren't watching with finger on the trigger or if you were and blinked, it was over as fast as it happened.


Volume and rapidity DID clog the human directed trading so there is some issue afoot of equal access to execution I believe. Are the markets too focused and accomodating to the machines? Should all markets share same speed bumps and delays uniformly? Above my paygrade and IQ. My only comfort is the buy order strike pricing mechanism worked as well as the dumping mechanism...at least this time. It'll be interesting to see who got crushed and who got rich.

[Bradly T.]

Did the same machines which sold on the way down buy back on the way up?

[James4]

I agree with Tad. From what I've been able to gather, the HFT and electronic market makers, the largest providers of daily liquidity, walked away en mass last Thursday, which resulted in a cascade of quant sellers (VWAP's, other algos, and other more sophisticated quants I'm sure) getting taken to the woodshed. The S&P 500 e-mini contract, which I track daily, was truly a sight to behold during that 30 minute period, as spreads blew out, volume exploded and it bounced around like a ping pong ball in a lottery machine.

I think all trades should stand - what human being would accept a price of $.01 on ACN? If someone is stupid enough to outsource all decision making to a computer, then they should accept the risks that come with that decision. Oh - forgot we are now a society that "voids" bad decisions rather than allow people to suffer consequences!

The one slush fund that I think absolute must be addressed, but which I doubt will be, are the HFT crowd with their strategically located server banks on the floors of the exchanges. These jerk stores add absolutely zero value and do nothing but scalp profits based on an unfair advantage. The exchanges love them due to the volume, and I'll believe that the SEC will do something about this when I see it.

It appears Goldman must have a major HFT operation, as they made money in every single trading day of Q1 this year. There is simply no way that can happen unless they are cheating, even if it is in a legal fashion. Its no wonder the typical retail investor is not chomping at the bit to return to the equity markets - at least they remain woefully ignorant as to how badly bond traders rip them off so they continue to flock to bonds!

[Tad Borek]

I would love to know how exactly Goldman batted 1.000 with its trading profits. I can speculate about some areas where you should be able to trade and make money consistently (e.g. "eating leveraged ETFs for lunch" and similar stuff with the UCO/USO kinds of vehicles, and garden variety arb trading) but I really don't know what GS is doing. And I don't have a bead on whether the HFTs are really siphoning off money or taking small profits in exchange for occasional big risks...if a few got hit last Thursday it would validate the idea that there isn't a free lunch sitting out there, you're just chasing pennies while taking on risks of the occasional big spanking. I can't think of a time when an order filled at a weird price and I thought a HFT was behind it.

A similar issue though, related to trading -- I've been thinking of BlackRock's unusual and perhaps unprecedented power in the marketplace now that it swallowed iShares. Think of the order flow to keep all their products going -- the dozens (hundreds?) of products and the hundreds of securities they hold, and trade almost constantly. It seems they have a lot of internal conflicts of interest that come to a head at their trade desk.

Jerk store is funny!

-Tad