So how do you propose a tobin tax is implemented? And for what currencies?
BTW Here is an interesting article from Themis Trading about the negatives of HFT. http://www.themistrading.com/article_files/0000/0348/Toxic_Equity_Trading_on_Wall_Street_12-17-08.pdfLIQUIDITY REBATE TRADERSTo attract volume, all market centers
(the exchanges and the ECNs) now offer rebates of
about 1⁄4 penny a share to
broker dealers who post orders.
It can be a buy or sell order, as
long as it is offering to do something on the exchange or ECN in question. If the order is
filled, the market center pays the broker dealer a rebate and charges a larger amount to the
broker dealer who took liquidity away from the market. This has led to trading strategies
solely designed to obtain the liquidity rebate.
In this case, our institutional investor is willing to buy shares in a price range of $20.00 to
$20.05. The algo gets hit, and buys 100 shares at $20.00. Next, it shows it wants to buy
500 shares. It gets hit on that, and buys 500 more shares. Based on that information, a
rebate trading computer program can spot the institution as having an algo order. Then,
the rebate trading computer goes ahead of the algo by a penny, placing a bid to buy 100
shares at $20.01. Whoever had been selling to the institutional investor at $20.00 is likely
to sell to the rebate trading computer at $20.01. That happens, and the rebate trading
computer is now long 100 shares at $20.01 and has collected a rebate of 1⁄4 penny a share.
Then, the computer immediately turns around and offers to sell its 100 shares at $20.01.
Chances are that the institutional algo will take them.
The rebate trading computer makes no money on
the shares, but collects another 1⁄4 penny
for making the second offer.
Net, net, the rebate trading computer makes a 1⁄2 penny per
share, and has caused the institutional investor to pay a penny higher per share.PREDATORY ALGOS
More than half of all institutional algo orders are “pegged”
to the National Best Bid or
Offer (NBBO). The problem
is, if one trader jumps ahead of another in price, it can cause
a second trader to go along side of the first one. Very quickly, every algo trading order in
a given stock is following each other up or down (or down and up), creating huge, whip
like price movements on relatively little volume.
This has led to the development of predatory algo trading strategies.
These strategies are
designed to cause institutional algo orders to buy or sell shares at prices higher or lower
than where the stock had been trading, creating a situation where the predatory algo can
lock in a profit from the artificial increase or decrease in the price.
To illustrate, let’s use an institutional algo order pegged to the NBBO with discretion to
pay up to $20.10. First, the predatory algo uses methods similar to the liquidity rebate
trader to spot this as an institutional algo order. Next, with a bid of $20.01, the predatory
algo goes on the attack. The institutional algo immediately goes to $20.01. Then, the
predatory algo goes $20.02, and the institutional algo follows. In similar fashion, the
predatory algo runs up the institutional algo to its $20.10 limit. At that point, the predatory
algo sells the stock short at $20.10 to the institutional algo, knowing it is highly likely that
the price of the stock will fall. When it does, the predatory algo covers.
This is how a stock can move 10 or 15 cents on a handful of 100 or 500 share trades.AUTOMATED MARKET MAKERSAutomated market maker (AMM) firms
run trading programs that ostensibly provide
liquidity to the NYSE, NASDAQ and ECNs. AMMs are supposed to function like
computerized specialists or market makers, stepping in to provide inside buy and sells,
make it easier for retail and institutional investors
to trade.AMMs, however, often work counter to real investors.
AMMs have the ability to “ping”
stocks to identify reserve book orders. In pinging, an AMM issues an order ultra fast, and
if nothing happens, it cancels it. But if it is successful, the AMM learns a tremendous
amount of hidden information that it can use to its advantage.
To show how this works,
this time our institutional trader has input discretion into the algo
to buy shares up to $20.03, but nobody in the outside world knows that. First, the AMM
spots the institution as an algo order. Next, the AMM starts to ping the algo. The AMM
offers 100 shares at $20.05. Nothing happens, and it immediately cancels. It offers
$20.04. Nothing happens, and it immediately cancels.PROGRAM TRADERS
Program traders buy or sell small quantities of a large number of stocks at the same time,
to trigger NBBO or discretionary algo orders, so as to quickly juice a market already
moving up or down into a major drop or spike up.
Because so many algo orders are pegged and are being pushed around by other high
frequency traders, program traders are like a fuse. When they light it, that’s when things
get really going. This is especially so in volatile markets when things are very shaky and
people are very nervous like they are now. Keep in mind that many algo orders must
achieve a percentage of volume that matches the market in the stock. So if the program
traders can increase the volume on an individual stock just enough, they will trigger even
more algo buying or selling.
Program traders profit by having an option on the market. Their objective is to push that
option into the money by a greater amount than what they used to get the market moving.MARKET CENTER INDUCEMENTS FOR HIGH FREQUENCY TRADERS
Most high frequency trading strategies are effective because they can take advantage of
three major inducements offered by the market centers and not typically accessible to retail
or institutional investors.1. Rebate traders trade for free.
Because they are considered to be adding liquidity,
exchanges and ECNs cover their commission costs and exchange fees. This makes it
worthwhile for rebate traders to buy and sell shares at the same price, in order to
generate their 1⁄4 penny per share liquidity rebate on each trade. Exchanges and ECNs
view the order maker as a loss leader in order to attract the order taker. In addition, the
more volume at different prices, even if that means moving back and forth a penny, the
more money the market center makes from tape revenue. Tape revenue is generated by
exchanges and ECNs from the sale of data to third party vendors, such as Bloomberg
for professional investors, and Yahoo for retail investors.2. Automated market makers co-locate their servers in the NASDAQ or the NYSE
building, right next to the exchanges’ servers.
AMMs already have faster servers than
most institutional and retail investors. But because they are co-located, their servers
can react even faster. That’s how AMMs are can issue IOC orders – immediate or
cancel – sometimes known as “cancel and replace.” They issue the order immediately,
and if nothing is there, it is canceled. And that’s how AMMs get the trades faster than
any other investor, even though AMMs are offering the same price. AMMs pay large
fees to the exchanges to co-locate, but it obviously has a decent return on investment.
According to Traders Magazine, the number of firms that co-locate at NASDAQ has
doubled over the last year.3. People often wonder whether it is fair or legal for program traders to move the market
the way they do.
Everybody forgets, however, that in October 2007, just a little more
than a year ago, the NYSE very publicly removed curbs that shut down program
trading if the market moved more than 2% in any direction.
The NYSE said it was
making the change because “it does not appear that the approach to market volatility
envisioned by the use of these ‘collars’ is as meaningful today as when the Rule was
formalized in the late 1980s.” On a more commercial level, the NYSE had been at a
competitive disadvantage because other market centers that didn’t have curbs were
getting the program trading business.What Is The Effect of All This Toxic Trading?
particularly in NYSE stocks. But you can’t look at NYSE
volume on the NYSE. The NYSE only executes 25% of the volume in NYSE stocks.
You’ve got to look at NYSE listed shares across all market centers, such as ECNs, like
the NYSE’s own ARCA, or dark pools, like LiquidNet. Traders Magazine estimates high frequency traders
for more than half the volume
on all U.S. market
2. The number of quote changes
The reason is high frequency traders
for hidden liquidity
. Some estimates are that these traders enter
from several hundred to one million orders
for every 100 trades
they actually execute.
This has significantly raised the bar for all firms on Wall Street to invest in the
computers, storage and routing to handle all the message traffic.
3. NYSE specialists no longer provide price stability. With the advent NYSE Hybrid,
specialist market share has dropped from 80% to 25%. With specialists out of the way,
the floodgates have been opened to high frequency traders who find it easier to make
money with more liquid listed shares.
4. Volatility has skyrocketed.
The markets’ average daily price swing year to date is
about 4% versus 1% last year. According to recent findings by Goldman Sachs,
spreads on S&P 500 stocks have doubled in October 2008 as compared to earlier in the
year. Spreads in Russell 2000 stocks have tripled and quoted depth has been cut in
5. High frequency trading strategies have become a stealth tax on retail and institutional
While stock prices will probably go where they would have gone anyway,
toxic trading takes money from real investors and gives it to the high frequency trader
who has the best computer. The exchanges, ECNs and high frequency traders
are slowly bleeding investors
, causing their transaction costs to rise, and the investors
don’t even know it.