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Wed Dec 26, 2012, 06:24 AM

High-Frequency Trading Prospers at Expense of Everyone

http://www.bloomberg.com/news/2012-12-25/high-frequency-trading-prospers-at-expense-of-everyone.html


Finally, a bit of evidence, rather than anecdote, about the costs of high-frequency trading.

In a new study, Andrei Kirilenko, the chief economist at the U.S. Commodity Futures Trading Commission, along with researchers at Princeton University and the University of Washington, examined high-frequency trading in a futures contract called the e-mini S&P 500, between August 2010 and August 2012.

The study looked at only the expiring contracts (which trade electronically on the Chicago Mercantile Exchange) that are used to bet on the direction of the Standard & Poor’s 500 Index. The researchers also did something they’d never been able to do before: Use actual trading data from individual firms, though none were identified.

What that data does is help explain the frenzy in today’s markets: The most aggressive firms tend to earn the biggest profits, hence the incentive to trade as quickly and as often as possible. Furthermore, these traders make their money at the expense of everyone else, including less-aggressive high- frequency traders.

The study found that the most hyperactive trading firms earned an average daily profit of $395,875 in the e-mini S&P 500 contract over the two-year period. First and foremost among those on the losing end: small retail investors. The study found that, on average, they lost $3.49 on every contract to aggressive high-frequency traders.

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Response to xchrom (Original post)

Wed Dec 26, 2012, 07:51 AM

1. people have tossed around the trade tax idea, but what about this: trade every 6 seconds.

the actual economic need to be able to trade at any instant a buyer and a seller can be matched escapes me.
what's wrong with batching up buy and sell orders every 6 seconds (nothing magical about that interval, it could be tweaked) and executing trades only on those intervals?

that would not only put a damper on high-frequency excesses, but it's also a simple way to level the playing field.

it also gets away from any tax controversy. no one can really gripe that it costs them actual money.

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Response to unblock (Reply #1)

Wed Dec 26, 2012, 08:42 AM

2. I prefer the Tax. If you can trade, you pay for the system.

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Response to xchrom (Original post)

Wed Dec 26, 2012, 08:52 AM

3. Brokerages are now jockeying to place their traders as physically close to the exchange

as possible to take advantage of millisecond delays in Internet traffic.

It's just nuts. I like the 6 second buffer idea. That would place all traders on a level playing field.

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Response to xchrom (Original post)

Wed Dec 26, 2012, 09:17 AM

4. High frequency trading gives lie to any lingering claims of a free market and level playing field.

 

The retail investor is the victim of this asymmetry of trading ability and those who claim otherwise are intentionally misleading people to the benefit of the plutocrats.

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Response to xchrom (Original post)

Wed Dec 26, 2012, 09:25 AM

5. This article should be enough for every retail investor to pull out their investments

and seek alternate investment options...

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Response to xchrom (Original post)

Wed Dec 26, 2012, 09:29 AM

6. Commissions are also much lower today because of the HF trading.

Even with a $3.49 loss per contract, that is still way lower than old school commissions to trade a $70,000 contract.

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