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High Frequency Trading - A force for good? or not?
Geoff James2
Posted: 06 February 2013 15:35:49(UTC)
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Hi,
HFT within the UK often gets mentioned in the media. I can't see there is any justification for this type of trading and would like to understand more.

Here is a view:-

1) If HFT fund is trading UK shares then they will be paying Stamp Duty on the buys. "IF" the are paying stamp duty then HFT fails due to the transaction costs being too great.

Therefore the funds must be negating stamp duty on shares using a tax efficient structure. The only ways to negate stamp duty that I am aware of is to be a UK charity or a sovereign wealth fund. As far as I can tell, neither of these categories have a legitimate use for HFT.

2) If the HFT funds are not trading UK shares, but trading futures as this negates the stamp duty - then we in the UK should place stamp duty on derivatives, in exactly the same way that several European countries are doing. (eg French Transaction Tax)

I can't see that HFT would have any place in a stable market.

Any views?
Geoff
Clive B
Posted: 07 February 2013 10:33:52(UTC)
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If it's legal, and I'm sure it is, I have no problem with it

You say "I can't see there is any justification for this type of trading".

I think we should be wary of that line of thinking, e.g. I might say "I can't see any justification for day trading, or for shorting stock" meaning "I want everybody to invest the way I do". Imo, that's simply twisting the market to suit one set of investors/traders.

Geoff James2
Posted: 07 February 2013 16:01:07(UTC)
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Hi Clive

I think you may have misunderstood.

I suggested that
1) If they are applying HFT to shares then only charities and sov wealth funds could apply it - But they have no place trading HFT.

2) If they are applying HFT to trading futures or options to negate the need to stamp duty, then we should apply a transaction tax

Hence HFT becomes a non-viable form of trading - what ever they trade now

Regards
Geoff
jeffian
Posted: 07 February 2013 16:11:36(UTC)
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But I have some sympathy with it, Clive, because to my mind HFT, daytrading, spreadbetting and trading EFT's isn't "investing" at all! If you accept that the main purpose of the markets is as a medium for companies to raise capital and provide a platform to value and trade their shares, the short-term fluctuations generated by modern trading methods is the antithesis of that. The fact that it's legal is beyond dispute; the problem is that trading technology has jumped ahead of anything that could be forseen when the 'rules' were established.
3 users thanked jeffian for this post.
colin wilson on 07/02/2013(UTC), Kenpen2 on 08/02/2013(UTC), plebeian plutocrat on 08/02/2013(UTC)
Clive B
Posted: 07 February 2013 17:07:33(UTC)
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Hi Geoff

Let's say there is no transaction tax on HFT and you add one. All that would seem to do is to shift the bar upwards in the size of anomaly that such trading programs would look for. I can't see it would eliminate it. I wonder if you're thinking of adding such a tax as it's "fair" or because you just want HFT banned. (I think we pay way too much tax already and am loathe to spend my time trying to find more areas to apply tax to)

Hi Jeffian

Can see what you're saying, but I'm in the market simply to make money. If my investments jumped by (say) 50% in a day, I'd probably sell immediately as I'd think "huge profit, unsustainable". Wouldn't worry me that it wasn't in the spirit of long term investment. (I trade for the short-medium term, on the basis I'll be dead in the long term !).
andrew r
Posted: 08 February 2013 08:32:31(UTC)
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High Frequency Trading is a technological progression which effectively now dominates the short term trading niche once occupied by scalp traders. Back in the day before the internet and electronic trading, human traders on the floor would often be buying and selling within seconds, as fast as they could shout the order. This was how, from the beginning of modern day financial markets over 100 years ago, liquidity and price discovery happened. Often a trader wouldn't really know much more about what they were trading than it's name.

Also, it's important to remember that HFT's trade against one another, the markets in essence match buyers and sellers. There are arguments to be made about aspects of high frequency trading, just as with anything else in life, but hey are not simple, black and white ones.

2 users thanked andrew r for this post.
Clive B on 08/02/2013(UTC), jeffian on 08/02/2013(UTC)
jeffian
Posted: 08 February 2013 09:11:13(UTC)
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Clive,

I accept what you say - we're all in the markets to make money - but I was trying to answer the question posed in the header.

"High Frequency Trading - A force for good? or not?"

I'd say "not" but, as you say, it's legal and it's here, so I'll just have to get over it.
Clive B
Posted: 08 February 2013 11:50:46(UTC)
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Jeffian

I suppose the only "good" thing one could say of HFT is that it ensure market liquidity.

Not so good when we have so called flash crashes of the market when too many HFT algorithms all decide to sell based on some trigger.
Ian Holmes
Posted: 10 February 2013 11:35:54(UTC)
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I'm by no means an authority on HFTs, but doesn't CFD trading qualify as HFT? If it does, there is no stamp duty payable, only the commission fees and leverage costs. If trading occurs within a one or 2-day period, leverage costs are far less than stamp duty - thereby eliminating that tax overhead.
jeffian
Posted: 10 February 2013 11:56:36(UTC)
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Ian,

I'll let Geoff James speak for himself, but by referring to High Frequency Trading, I assumed he was referring to 'bots' trading automatically on pre-programmed signals which trade huge volumes of shares in nano-seconds, never mind 1 or 2 days!
Clive B
Posted: 10 February 2013 13:47:13(UTC)
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fyi There's an article in today's Sunday Times magazine that describes the start of some HFT and the rise of so-called Quant(ative Analysis) trading
Ian Holmes
Posted: 11 February 2013 04:24:26(UTC)
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Thanks Clive B and jeffian for the pointers.

I've just spent an enlightening time whilst enjoying my morning coffee learning a little about computer driven HFT.

I'm in SE Asia at the moment, enjoying the warmth away from the UK winter so can't get a copy of the Sunday Times Magazine (small price to pay!!), but I did find this excellent article from the NY Times which may be of interest to you too:

http://topics.nytimes.co...thmic_trading/index.html
1 user thanked Ian Holmes for this post.
Clive B on 11/02/2013(UTC)
andrew r
Posted: 11 February 2013 10:01:54(UTC)
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Ian, cfd's and HFT's (high frequency trading) are different tading concepts.

Cfd's are created by individual brokers and traded off exchange, ie over the counter (OTC). The broker is the counter party to every trade and provides the liquidity, matching buyers and sellers. Generally though cfd traders would hold a position for relatively short time periods, intra-day or perhaps a few days, HFT's are trading directly through exchanges in sub-second time periods.

All trading involves employing a statistically profitable strategy, consistently - bit of tongue twister there! HFT's are programmed with algorithms generally based on historic price patterns like consolidations, high's and lows, volume, time of day etc. Human traders trading cfd's OTC futures, options, or shares on an exchange, such as the LSE, or CME do much the same, only they interpret the information visually, and manually put in their orders. HFT's now control the very short time frame arena, because of their technological advantages.

Physically, because of the time taken to click a mouse or press or a hot key manual trades cannot be executed at sub second speeds, so really by definition manual trading, of whatever type, cannot be done sub-second.

That's my take on the difference anyway. I don't know how or if a proprietary HFT company has any special advantages by way of tax etc. I wouldn't think so but someone else might know more.



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Ian Holmes on 11/02/2013(UTC)
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