David Stockman, Reagan economist, on debt spree

[BlueStreak]

JonL;

Don't you realize that when the government collects a tax, it's "theft", but when a man in a suit who works outside the government "skims" us, as you put it-----It's perfectly okay, he's just trying to get rich?

(Gee, I wonder who might have the financial where-with-all to advance that kind of thinking might be?)

Dave

[flacaltenn]

JonL:

I'm an engineer/scientist type. Really worship numbers, and logic and that crap.. When someone complains about computers involved in "algorithmically skimming" because we can now make trades in microseconds, rather than hours -- i look for a model..

You've watched a stock ticker for a couple minutes during trading. Where does it go? It TRENDS higher or lower over minutes, maybe hours, but in the course of a SECOND? It might be +/- $0.02. If you limited trades to a SECOND, rather than MILLIONTH of SECOND, would it make any difference? 100,000 shares "skimming" $0.02 makes a cool $2000. However, if you program in the "trend" and sit around awhile longer, you might be able to "optimize" that transaction to $4000 or so..

So it isn't the SPEED of trading that has potential for "skimming". Just like an ICE engine computer doesn't need to sample the sensors at a microsecond. A millisecond will do just fine. Probably what you're calling skimming are just the algorithms that have been developed to optimize a trade. (I've got NO problem with that) And to some extent, the most measly day trader now has the power on his desktop to do analysis and hook into the market in ways that were unimaginable just 10 years ago. Sure, the big guys put MORE effort into "algorithms". It takes a lot of the human emotion out of analyzing the "sensor inputs". And last time I check, even IBM'S Watson had yet to learn greed...

Just so you know I'm human -- if it's NOT just optimizing trades (which EVERY registered broker has access to), and there is massive theft goin' on -- please let ME know first. Then call the SEC...

[JonL]

flacaltenn, read this article, or google "latency arbitrage." Then get back to me.

[whell]

Originally Posted by JonL

flacaltenn, read this article, or google "latency arbitrage." Then get back to me.

Let's assume that this is truly happening and we are all getting "ripped off" by this practice to the tune of $3 billion a year. To put this $3 billion in perspective, the NY Stock Exchange trading volume is around $155 billion per day. And that's not to mention the volume traded on the other stock exchanges world wide.

While the practice of latency arbitrage doesn't leave me feeling all warm and fuzzy, it is in real terms annoyance on par with the drop or two of gas that drips from the nozzle when you're done gassing up your car.

[JonL]

Originally Posted by whell

Let's assume that this is truly happening and we are all getting "ripped off" by this practice to the tune of $3 billion a year. To put this $3 billion in perspective, the NY Stock Exchange trading volume is around $155 billion per day. And that's not to mention the volume traded on the other stock exchanges world wide.

While the practice of latency arbitrage doesn't leave me feeling all warm and fuzzy, it is in real terms annoyance on par with the drop or two of gas that drips from the nozzle when you're done gassing up your car.

So why would adding, say, $1B to the nation's revenue through taxation of this be a bad thing? That's the context of this. Stockman brought up taxing this kind of high frequency trading, I thought it was a good idea, and our resident "can't do anything" man, Flacaltenn thought it would be a detrimental drag on the market.

In a bigger picture kind of way, doesn't the fact that the major exchanges are in collusion with these thieves raise other concerns? How's that "free market" workin' for ya?

[flacaltenn]

whell:

Right on.. Didya notice that the main thrust here is NOT how to fix the problem, but how to justify TAXING trades. I figure the problem here is mis-diagnosed and not in proper priority of abuse.

JonL:
I'm back to 'splain why taxing transactions does NOTHING to fix this problem (if you want to insist that's it's a horrible monstrously big problem). Dark pools are unregulated. They exist to match buyers/sellers because there is always a split between the asking price and the bid price. THAT gap alone is more than the transaction latentcy of a few milliseconds. So TAXING all the OPEN market orders would do NOTHING NADA to fix the problem.

Furthermore, if I place a BUY order with my broker, and the market price is going DOWN, I hope he's located on another PLANET so that the transmission latency is MINUTES or HOURS... Besides even as a weenie investor, I can place limits on that trade so that it's got to settle EXACTLY at the price I want to get or better. I'm not harmed and you aren't either. In fact, the $15 transaction fee or better is MY highest concern, not withstanding the irritation I'd face by being subject to a meaningless Fed Tax on that transaction.

The article also confuses what the incomes of these latency traders are with how much of that income was a direct of skimming a a couple of pennies per share. The experiment in that article was also a head-scratcher, because in reality, the investigator placed a dummy bid order to affect the mean bid/ask price on the GENERAL MARKET. But the trade went thru EXACTLY as he ordered in the dark pool. He got EXACTLY what he asked for. And rather than just speculate that his ploy of lowering the bid/ask in the general market enabled the scalpers to scalp him by 0.02, an alternate explanation is that the scalpers ignored the General Market price because the CUSTOMER asked for a transaction in the dark pool..

In other words, go ahead and make it illegal for folks to discuss buy/sell offers outside of the official exchanges (good luck with that). But don't use volume or speed of transactions as an excuse to add a tax that won't affect ANY of the practices described here. After all, in that example, it was NOT VOLUME trading that "could have" skimmed a couple cents -- it was ONE well-timed trade. The same one time trade for which you want to punish me and everyone else for..

And anyway, you gonna tax all the BIDS I place to buy Disney at ridiculously low prices? Or just the one order that actually connects with a seller and results in a sale? Don't tell me it's the former because that would SERIOUSLY handicap the ability to actually connect willing buyers with willing sellers...

I just bought tickets for a Sugarland concert thru an "authorized broker" that the venue linked to. The tickets were marked up 120% over the arena price. Why don't we fix that first? Why is it illegal for some dude to stand outside and ask 50% over, when the venue is directing folks to brokers who mark them for %120? TAX THAT!!!

[JonL]

OMG. Flacaltenn, you cannot admit that anything is ever wrong unless the government is behind it.

Latency arbitrage is nothing but collusion between the exchanges and a handful of well-placed hedge funds with the goal of simply skimming money out of the system. It is itself like a tax, but a private tax. I guess that's why you see nothing wrong with it. It does nothing to add transparency or stability to the markets. And there's no risk associated with the practice.

Yet instead of being able to actually agree - at all - with someone you have labeled a "leftist," you once again use this tired old bait-and-switch tactic... change the subject to ticket scalping??? WTF?

You said: "Just so you know I'm human -- if it's NOT just optimizing trades (which EVERY registered broker has access to), and there is massive theft goin' on -- please let ME know first. Then call the SEC..." I let you know, but since it came from a "lefty," I guess the ticket scalping is a bigger issue.

Oh, I guess $3 billion isn't "massive" enough theft when it's going to people who are likely to be republicans. But heaven forbid a regular worker should be able to negotiate a living wage or get affordable health care. I can only imagine the hew and cry that would ensue if $3B were "stolen" from the federal budget by a group unpopular with the right. Oh yeah... how much time and money and bile was spewed over ACORN? You know how much federal money they received? $1.7 Million in 2008 and $2.2 million in 2009. Even if there were many improprieties in their use of the funds (and I'm not saying there were or weren't), they "wasted" less than 1/1000 of the money being stolen from investors through latency arbitrage.

[JonL]

Originally Posted by flacaltenn

whell:

Right on.. Didya notice that the main thrust here is NOT how to fix the problem, but how to justify TAXING trades. I figure the problem here is mis-diagnosed and not in proper priority of abuse.

The taxation proposal came from Stockman who's looking under every rock to find palatable sources of revenue the country desperately needs, even if there are also massive cuts in spending.

He's not looking to fix every problem. He's looking to raise revenue.

But I guess to you guys it's more important to go after workers, the poor, the elderly, rather than explore taxing a class of transactions that do nothing but enrich those who buy a seat at the table while taking on exactly zero risk.

[flacaltenn]

Question is JonL, are YOU "looking to fix the problem" or just trying "to raise revenue?

Because the article you quoted makes NO indication that the VOLUME of speedy trading had anything to do with the "skimming".. Actually in fact, it didnt' convince that speedy was the key asset that made the scheme work either..

And I asked you whether you wanted to tax each BID placed or each transaction settled and all I got was a tirade of how I was ignoring the problem.

If you want to fix the problem, I'll entertain any suggestions you have.. But I'll be damned if you want to create AN excuse that makes it OK to arbitrarily tax something that will have no effect on the problem.. Just rationality, not indifference.

[JonL]

Read the article again. Or at least read it for the first time. Speed is the ENTIRE reason that scheme works. It is the reason why the computers doing the trades need to be located close to the exchanges. It's right there in the name... LATENCY. It means the algorithm has a few microseconds to know what trades are coming, evaluate how they are going to affect pricing, and get in ahead of the trade to make a few pennies.

Personally, I'd like to see this kind of trading - latency arbitrage - be illegal. It was Stockton who raised the issue of taxing it, and I'd say that's fine. I don't know by what method. This has nothing to do with taxing every trade conducted in the normal fashion by normal investors or day traders or even program trades that look at longer term (minutes or hours) market trends.