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High Frequency Trading – Economic Effects

High Frequency TradingMark Cuban, owner of the Dallas Mavericks, Landmark Theaters and Magnolia Pictures, recently wrote an editorial regarding the OWS (Occupy Wall Street) movement. As someone who is “part of the 1%,” it may come as a surprise that Mark is in favor of the movement. His reasons are stated in the Business Insider article.

Whether you’re for, against or neutral on the OWS movement, Mark’s high frequency / black box trading comments are interesting. In part four of the editorial, he states the following:

“In a world of High Frequency Trading and black box trading that does nothing but create a platform for ‘financial hackers’ to turn the market into their own proprietary financial playground, we need to figure out a way to revert the Stock and Bond Markets, and the derivative instruments created from these equities, back to their original purpose, a place to raise capital for growing business. Instead, today it’s a platform for financial engineers and hackers looking to exploit every and any opportunity. When 60% or more of trades are from High Frequency/Algorithmic traders and the correlation for every market index rushes past .7, the market is no longer a market, it’s a platform.

The simplest way to change this is to place a very simple per share tax on every transaction. 10 cents a trade. Every share. Every option. Every Bond. Every currency transaction. Every trade.

The obvious response is that trading volume will plummet. So what? Let it. The next response is that traders will merely move their trades to foreign exchanges. Yes they will. Will transaction costs go up? Duh.. that is the point. The market thrived when spreads and transaction costs were much higher just a few short years ago. It will survive now.

More importantly, it might just put the market back to the basics of what the stock and bond markets are supposed to be, a means of raising capital to support corporate growth. There used to be a time when Investment Bank Partnerships made their money scouting out small companies in need of capital and matching them with investors. They weren’t as big as they are now, but they managed to create quite a few growth industries. Something we could use some of today. Making the stock market a launching pad for companies will have far greater value and impact employment far greater than making sure High Frequency Traders can get their trades in.”

Day Trade to Win is obviously not a high frequency system, nor do the methods we teach dabble in producing an excessive amount of trades using hundreds of thousands of dollars in contracts. Our traders are considered “retail” – observing market conditions and manually take trades at their own pace using a strategy they feel works best under current market conditions. Many of our traders make a living at home, without a degree in finance, astrophysics or software engineering. In addition, DTTW-style trades are placed using publically available platforms such as NinjaTrader or TradeStation. These trades are placed from locations throughout the world by humans; not by advanced AI software running in a 40 degree room a block away from the CME.

Should there be an additional government tax on every trade placed such as Mark’s proposed 10 cents a trade?

Is high frequency trading ruining the economy?

What would day trading be like, as a retail trader, without market movement caused by high frequency trading?

Does day trading (stocks, options, futures, etc.) offer any value to business, the economy or humanity as a whole?

Let us know what you think.

10 Comments

  1. Joe Theo
    Oct 31, 2011 @ 01:35:55

    If that is to make a more level playing field, why not? Else the HFT and the algo dominate.

  2. JOHN PAUL
    Oct 30, 2011 @ 11:09:30

    That movie he financed a few years back did not sit well with many people. I’m with you on that point. He made a Sh%! load of money on trading first…. then expanded to his other ventures. Any transaction tax will hurt everyone not just short term traders. The implications are huge and government needs to stay out of the market. We are already at a disadvantage on the world stage – the good thing is that the good people are waking up and realizing what’s occurring. -JP

  3. JOHN PAUL
    Oct 30, 2011 @ 11:03:27

    So far Steve the HFT haven’t taken over but this aspect of the trading game should be closely watched as if it becomes more and more prevalent, the little guy may have a harder time keeping up. Watch what happens during news events when the market rockets out of control. Those are actions based on emotions and traders. The HFT can’t yet account for that chaotic movement. Lets see how things unravel in the near future and regulations that are being proposed. -JP

  4. JOHN PAUL
    Oct 30, 2011 @ 11:00:06

    More Taxes in my opinion do not help anyone, more regulation makes the industry even worst off. I agree that the focus should be on other aspects as you suggest – which will undoubtedly open a new can of worms for the industry. Less is more as i like to say and trade and less, more refined regulations should be addressed first. -JP

  5. diablo 3 forum
    Oct 30, 2011 @ 09:54:29

    I genuinely like your web site and the trading videos. I will be at the next webinar that teaches emini trading and price action trading for me and my wife.

  6. BH
    Oct 29, 2011 @ 02:56:28

    Mark Cuban is a very selfish man who only cares about his own financial interests. Most high frequency trading is simply arbitrage. It increases liquidity and keeps bid/ask spreads low.

    Any transaction tax will hurt short term traders, take wealth from the private sector and transfer it to government and put our financial exchanges at a competitive disadvantage.

  7. Steve
    Oct 28, 2011 @ 14:50:18

    HFT means keep out their way (big bars) with bigger stops.

  8. master digger
    Oct 28, 2011 @ 14:29:56

    there are a lot of strategies and day traders that would fail if such high further taxes/commissions are introduced. more taxes for everybody, that is not right.
    the problem, mr. cuban, is the whole system. if you want to change, change it all and we will be pushed back 100 years or more. not saying that wouldn’t be better, just no sense to focus only on what you are suggesting without changing things and (new) principles that need much more to be addressed first …

  9. jose
    Oct 25, 2011 @ 10:48:54

    i would like to learn how to day trade being able to take 2 points a day i’m sick n tired of losing my money to indicators and brokers

  10. batters up
    Oct 24, 2011 @ 14:44:59

    high frequency systems are dubious and should not be relied on

    instead look for a method that you can decrease the quantity and increase the quality

    this is only logical

    think about it

    i day trade emini at most 3 times a day – i think similar to how dttw does

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