High-Frequency Trading Machines Favored Over Humans by CME Group,
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Futures Contracts, High-Frequency Trading, Lawsuits, Business News
A small band...
By Hilary Farrell
Last week, 11 financial and Wall Street firms, including the Security
Traders Association and NYSE-Euronext issued statements on future practices
for fair markets. Perhaps not so surprisingly, the...
By Scott Patterson and Jenny Strasburg
U.S. regulators are about to take a big step toward reining in
high-frequency trading: defining what it is.
On Wednesday, a Commodity Futures Trading Commission subcommittee...
In the past ten years the futures industry has initiated rule changes,
algorithm changes and most recently hours changes, in a self-destructive
trend favoring aggressor market takers over passive market...
* CFTC commissioner hosts meeting of traders in Chicago
* Chilton favors registering high-frequency traders
* Public comment period set to start soon
By Tom Polansek
CHICAGO, June 11 (Reuters) - The Commodity Futures...
BY Dave Lauer
During my appearance on NPR's Marketplace last week, I discussed why I left
the high-frequency trading (HFT) business. When I learned that I was about
to become a...
MARK CUBAN: HIGH-FREQUENCY TRADERS ARE THE ULTIMATE HACKERS
By Scott Patterson
(The Q&A below is the first in a two-part series looking at high-frequency trading. Click here to read the second part.)
Mark Cuban is best-known for his success as a businessman and pro basketball owner. But in the past few years, he has also gained a reputation as one of the most prolific critics of high-speed computer trading.
Cuban has been following the market for years — and has had a few run-ins with regulators along the way — but only after the flash crash of May 6, 2010, when glitches in computer trading systems helped trigger a heart-wrenching decline in stocks, did he start to worry that something was amiss. Cuban, who made his fortune in the technology industry, says he was concerned by how prominent of a role computer trading had taken in today’s markets. Having seen how technology can easily malfunction, he worried that the market was far more fragile than many realized. He also questioned whether high-frequency traders, which send waves of buy and sell orders into the market, serve a useful purpose in the market.
Concerns about the impact of rapid-fire trading on the markets has ramped up of late, especially after technical glitches at Nasdaq fouled up Facebook’s trading debut. Last Wednesday, market honchos such as NYSE Euronext Chief Executive Duncan Niederauer were grilled by lawmakers in a hearing about the current state of the market. One clear message from the hearing was that a proliferation of computer trading and opaque markets has hurt investor confidence. Niederauer in his written testimony said a big factor in the waning confidence was that “an ever-increasing volume of trading in equities occurs in dark markets.”
The Wall Street Journal recently caught up with Mr. Cuban via email and asked for his views on the state of today’s stock market.
WSJ:When did you start becoming concerned that rapid-fire trading was a problem?
Mark Cuban: When the flash crash hit, that got me looking at algorithmic trading and the state of the market. I came to realize that the stock market no longer knew what business it was in. I wrote a blog that basically said that the markets for equities of all kinds had evolved to a platform for hackers.
That got me looking further into issue of high-frequency traders. They are the ultimate hackers. They’re running software programs that have one goal, and that’s to exploit the trading systems as early and often as possible. As someone who wrote software for eight years and who keeps up very closely with the technology world, that scared the hell out of me. The only certainty in the software world is that there is no such thing as bug-free software. When software programs are trying to outsmart other software programs and hack the world’s trading platforms, that is a recipe for disaster.
WSJ:The Facebook IPO is a recent example of software gone haywire. Is that a sign that things have gotten too complex? It’s certainly hurting investor confidence.
MC: And BATS couldn’t get their software right for their own IPO. Why? It should be easy. They’ve been doing IPOs in electronic markets for years. Why did it fail now? If they can’t get an IPO they completely control right, does anyone really think that the software that controls the hundreds of millions of human-free interactions a minute is really bug free and cannot fail?
How many times an hour are there failures across individual equities around the world because of software running algorithms battling each other for supremacy to make a profitable trade? We have no idea. It’s not a question of if or when we have meltdowns, it’s just a question of how big and where. It’s straight out of War Games. And that’s before we even get to the possibility of nefarious or sovereign hackers getting involved.
WSJ:What do you say to the argument that high-speed traders provide liquidity to markets and narrow spreads? The argument is that those benefits outweigh the negative side effects that you’re talking about. If the HFTs are pushed out of the market, they say, regular investors will wind up paying more to buy and sell stocks.
MC: That’s a bogus argument. By definition they can’t go into an equity unless there already is liquidity. To say they’re adding liquidity is like saying spitting in a thunderstorm is adding liquidity.
As far as narrowing spreads, that’s absolutely true, but in absolute terms what does it translate into? For the individual investor it might save them a quarter a month. So what? Relative to the risk that’s the worst tradeoff in the history of tradeoffs
And the argument is horrible for another reason. If you’re an investor you shouldn’t care if the spread widened by a penny, nickel dime or quarter. If you’re anything but a trader the change is of no impact to whether or not the company will be successful and create returns for investors. In fact, that anyone even considers this a valid argument is a red flag that the exchanges are more interested in traders than investors.
WSJ:What’s the solution? There have been some calls for a transaction tax recently for instance.
MC: Public companies need to figure out what business the exchanges are in. Is the market supposed to be a platform for companies to raise money for growth and to create liquidity and opportunity for shareholders as it has been in the past? Or is the stock market a laissez-faire platform that evolves however it evolves? The missing link in all the discussions is: What is the purpose of the stock market?
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