"Flash Boys", a year after

I wrote before about "Flash Boys".

Michael Lewis wrote a follow-up on his book, one year after it's publication. One snippet:


His [the president of BATS, one of the exchanges] defining moment came when Katsuyama asked him a simple question: Did BATS sell a faster picture of the stock market to high-frequency traders while using a slower picture to price the trades of investors? That is, did it allow high-frequency traders, who knew current market prices, to trade unfairly against investors at old prices? The BATS president said it didn’t, which surprised me. On the other hand, he didn’t look happy to have been asked. Two days later it was clear why: it wasn’t true. The New York attorney general had called the BATS exchange to let them know it was a problem when its president went on TV and got it wrong about this very important aspect of its business. BATS issued a correction and, four months later, parted ways with its president.


My own opinion: I don't think that HFT (High Frequency Trading) is a real problem for long term investors. It might be though for short term traders who turn over their holdings very often.

HFT does not add anything to the economy, it merely transfers some wealth from some (the huge majority of the investors) to some others (the HFT players). Exchanges will profit from the higher turnover in the short term. Not sure if they profit in the longer term though, some investors might not like HFT and either abandon the exchange or lower their turnover.

Exchanges have an important role in growing the economy of a country. They should be non-profit organisations, focused on regulation an orderly market, fair to all participants. HFT clearly doesn't belong in that picture.

Exchanges could make HFT impossible or at least very difficult by certain implementations, like delaying orders and/or prices, increasing their commissions, randomly matching orders in a batch, making sure that HFT traders do not have more information then other market players, etc. I am sure that clever people in the industry can come up with some effective methods.

HFT traders could then focus on something more meaningful, like coming up with a cure for cancer, building new technology, etc.

Unfortunately, most exchanges are privatised and therefore are looking to maximize their profits, often with the focus on the short term.

Mark Cuban on High Frequency Trading

To the person who approached me about High Frequency Trading: I am not exactly an expert on this subject, although I have read a quite a bit about it.

One article I just read made a lot of sense to me, it is written by Mark Cuban, one of the "sharks" of the Shark Tank.

"The Idiots Guide to High Frequency Trading"

"1.  Electronic trading is part of HFT, but not all electronic trading is high frequency trading.
Trading equities and other financial instruments has been around for a long time.  it is Electronic Trading that has lead to far smaller spreads and lower actual trading costs from your broker.  Very often HFT companies take credit for reducing spreads. They did not. Electronic trading did.
We all trade electronically now. It’s no big deal.

2. Speed is not a problem
People like to look at the speed of trading as the problem. It is not. We have had a need for speed since the first stock quotes were communicated cross country via telegraph. The search for speed has been never ending. While I don't think co location and sub second trading adds value to the market, it does NOT create problems for the market.

3. There has always been a delta in speed of trading.
From the days of the aforementioned telegraph to sub millisecond trading not everyone has traded at the same speed.  You may trade stocks on a 100mbs broadband connection that is faster than your neighbours dial up connection. That delta in speed gives you faster information to news, information, research, getting quotes and getting your trades to your broker faster.
The same applies to brokers, banks and HFT. They compete to get the fastest possible speed. Again the speed is not a problem.

4. So what has changed ? What is the problem
What has changed is this. In the past people used their speed advantages to trade their own portfolios. They knew they had an advantage with faster information or placing of trades and they used it to buy and own stocks. If only for hours. That is acceptable. The market is very Darwinian. If you were able to figure out how to leverage the speed to buy and sell stocks that you took ownership of , more power to you. If you day traded  in 1999 because you could see movement in stocks faster than the guy on dial up, and you made money. More power to you.

What changed is that the exchanges both delivered information faster to those who paid for the right AND ALSO gave them the ability via order types where the faster traders were guaranteed the right to jump in front of all those who were slower (Traders feel free to challenge me on this) . Not only that, they were able to use algorithms to see activity and/or directly see quotes from all those who were even milliseconds slower.

With these changes the fastest players were now able to make money simply because they were the fastest traders.  They didn’t care what they traded. They realized they could make money on what is called Latency Arbitrage.  You make money by being the fastest and taking advantage of slower traders.

It didn’t matter what exchanges the trades were on, or if they were across exchanges. If they were faster and were able to see or anticipate the slower trades they could profit from it.
This is where the problems start.

If you have the fastest access to information and the exchanges have given you incentives to jump in front of those users and make trades by paying you for any volume you create (maker/taker), then you can use that combination to make trades that you are pretty much GUARANTEED TO MAKE A PROFIT on.

So basically, the fastest players, who have spent billions of dollars in aggregate to get the fastest possible access are using that speed to jump to the front of the trading line. They get to see , either directly or algorithmically the trades that are coming in to the market."


Please read the remaining article at the link above for more. Also the comments provide quite a few good pointers.

I would be very interested to know the exact situation both regarding Bursa and SGX. Are they allowing HFT? If so, what percentage of the trades are executed by them? To what extend can HFT players get an advantage?

Michael Lewis: "Flash Boys" (2)

An alternative, rather critical view on Michael Lewis' latest book can be found here:

"Michael Lewis’ Repeat Omission: No Crimes Were Committed"

In Flash Boys, Michael Lewis has again launched a book that hews to his established formula: colorful outsiders take on a big bad entrenched establishment and win. Even though Lewis seems assured of having yet another best-seller, this book is getting more criticism than his works usually do. Put it this way: when commentators as diverse as Felix Salmon, Matt Levine, and Pam Martens feel compelled to object, it looks like Lewis has overfitted this tale to his blockbuster formula.


One of the mentioned links is written by Pam Martens:

"60 Minutes Sanitizes Its Report on High Frequency Trading"

Another interesting link is written by "Streetwise Professor":

"Michael Lewis’s HFT Book: More of a Dark Market Than a Lit One"

Michael Lewis: "Flash Boys"

Michael Lewis, one of my favourite writers, has written a new book, "Flash Boys".

Some excerpts from the article "The Hero Of Michael Lewis’ New Book Is A Mysterious Stock Exchange That Goldman Sachs Loves", published on Business Insider:


Michael Lewis and his publisher have done an excellent job keeping the details of his new book, ‘Flash Boys: A Wall Street Revolt’, completely under wraps, but some details are leaking out.

The book is about high frequency trading, and a firm called IEX that has created a separate exchange where everyone — fast or super fast — is safe to trade.

Critics say that firms that trade at high speeds can harm other actors in the market, and even cheat them out profitable trades.

"We view IEX’s core mission as simplifying an overly complex market structure trough a transparent rule set, minimal number of order types, and most significantly, a speed buffer that intentionally slows down trading in their market, relative to other venues"

“The U.S. stock market now trades inside black boxes, in heavily guarded in New Jersey and Chicago,” he writes in the prologue. “What goes on inside those black boxes is hard to say.”

IEX was born at the Royal Bank of Canada in large part thanks to Brad Katsuyama, the man who ran the bank’s U.S. trading desk. Katsuyama has been outspoken about the problems with HFT before, and it was he who lead the defection from the firm.

The goal, Lewis writes, was to “restore fairness in the U.S. stock market.” Katsuyama had watched his clients get nickeled and dimes while trading for them.

“I started to realize that, day in and day out, I was getting screwed,” Katsuyama told the New York Times last year.


Other reviews of the book can be found here and here.

The above is highly relevant for Bursa Malaysia, which has introduced a trading engine powered by NASDAQ OMX. It would be good if Bursa Malaysia would take a public stand in the matter of High Frequency Trading: are they going for the short term (increased trading by HFT players at the expense of the other traders and investors), or are they aiming at the long term (a fair market for all, where clients do not get nickeled and dimed).

The SGX, unfortunately, seems to have made their choice already, according to this article "Singapore Exchange Seeks High-Frequency Traders".

I have been very critical about High Frequency Trading before, and don't intend to change that stand, unless proven otherwise.

High volume trading does not equate creating shareholders value or enhancing the economy of a country, it is simply creating profits for a very small number of market players and the exchange, at the expense of all other participants.

Berkshire Hathaway is an example of a company that created tremendous value for its shareholders:

Its average daily trading volume is however only 437 shares. I don't think any of it's shareholders mind.

Short-termism is a fundamental problem in equity markets

Interesting Article by Andrew Sheng in The Star today:

"Do stock markets serve investors?

Some snippets:

In the wake of the current crisis, the British government invited LSE Prof John Kay to review the UK equity market and its impact on the governance of UK-listed companies. The report was published on July 23 and has many lessons on the theory and practice of Asian stock markets.

Stock markets play an important role in the economy, by enabling listed companies to raise capital, improve the price discovery of shares, help in risk management at the corporate and national level and also exercise discipline on the corporate governance and performance of listed companies. The series of crises in stock markets in Asia (1997-99), the tech bubble (2000) and the current crisis (2007-2011) all questioned whether stock markets perform well in practice.

Kay's study suggested that short-termism is a fundamental problem in UK equity markets and that the principal reasons are a decline in trust and the misalignment of incentives throughout the equity investment chain. These underlying trends are reflected in facts about the UK equity market. British companies are investing less in the real economy, their investments falling from over 13% of GDP to less than 10% of GDP and their R&D is the lowest compared with the United States, Germany and France.

In fact, new net equity issuance by British-listed companies has been negative in the last decade, with IPO new capital offset by share buybacks and acquisition of listed companies by cash. This is not only because listing costs are high, but also because the total return on listed shares have been disappointing the FTSE all-share index returned 4.5% per annum in the last decade.

The author suggests that 4.5% per annum is a disappointing result for long term investors in British equities. I am afraid that 4.5% was a very decent result, almost the best one could wish for in the last 15 years or so. Here is the 50-year graph of the FTSE All shares index:

The return of 4.5% is based on 2002 where the FTSE was below 2000 points and its current value of about 3000.

In contrast, people who would have started investing in 1999/2000 or 2007/2008 would have negative returns.

To calculate the real returns:

• plus: dividends, a few percent a year, probably 3% per year
• minus: expenses, probably 1% per year
• minus: inflation, severely underreported by most countries in the world (Malaysia is not an exception), my guess for the UK is about 5% per year

The Kay Report is concerned about short-termism, because in the UK, hedge funds, high frequency traders and proprietary traders account for 72% of market turnover, but roughly one third of shareholding ownership. It is their short-term behaviour that drives prices, and there is concern whether their short-termism create bubbles far beyond fundamental value. During crises, their short-termism reduce liquidity and exacerbate stress.

One basic thrust of the Kay Report is that all participants in the equity investment chain should act according to the principle of stewardship, which is founded on trust. Hence, the report recommends that regulatory practice should favour investing over trading, not the other way round. In other words, the regulatory framework should enable and encourage companies, savers and intermediaries to adopt investment approaches that achieve long-term value.

In this current world of short-termism, this is easier said than done, since many financial intermediaries, especially investment banks, make more money from short-term trading than from long-term investing. What is very interesting is that the Kay Report felt strongly enough on short-termism to recommend that mandatory quarterly reporting obligations be removed. This is music to the ears of corporate captains who feel that they should be focused on building long-term value, rather than worrying about how the next quarterly report would depress stock prices.

The Kay Report is very much welcome as a fundamental review of how stock markets should perform their important function of helping the real economy grow and create jobs for the long term. These are important lessons for Asian stock markets, investors and financial regulators.

Some general comments about the Kay report can be found here, the report (111 pages) itself here, a review by The Guardian here.

Food for thought for the Malaysian authorities, although I strongly recommend to skip the paragraph about stopping the requirement for quarterly reporting. The fact that some people misinterpret quarterly reporting is no reason not to publish them.

What is the business of an exchange?

Outspoken billionaire Marc Cuban is an US investor and participating in one of my favourite TV series "Shark Tank", where founders pitch their ideas to a panel of judges who put their money where their mouth is. Parts of episodes are easily available on YouTube. Cuban can come across as rather arrogant, but he also did quite a few very fair deals in the TV show.

Marc Cuban spoke out against High Frequency Traders (HFT) in a recent interview in The Wall Street Journal. Some snippets from this article:

Concerns about the impact of rapid-fire trading on the markets has ramped up of late, especially after technical glitches at Nasdaq fouled up Facebook’s trading debut. Last Wednesday, market honchos such as NYSE Euronext Chief Executive Duncan Niederauer were grilled by lawmakers in a hearing about the current state of the market. One clear message from the hearing was that a proliferation of computer trading and opaque markets has hurt investor confidence.

Mark Cuban:

"That got me looking further into issue of high-frequency traders. They are the ultimate hackers. They’re running software programs that have one goal, and that’s to exploit the trading systems as early and often as possible. As someone who wrote software for eight years and who keeps up very closely with the technology world, that scared the hell out of me. The only certainty in the software world is that there is no such thing as bug-free software. When software programs are trying to outsmart other software programs and hack the world’s trading platforms, that is a recipe for disaster."

"Public companies need to figure out what business the exchanges are in. Is the market supposed to be a platform for companies to raise money for growth and to create liquidity and opportunity for shareholders as it has been in the past? Or is the stock market a laissez-faire platform that evolves however it evolves? The missing link in all the discussions is: What is the purpose of the stock market?"

Cuban did write about this last issue in the past on his own blog:

"However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy.  It won’t come from traders trying to hack the financial system for a few pennies per trade.

Wall Street as a whole needs to be in the business of creating capital for companies and selling shares to investors who believe they are shareholders.  The Government needs to create incentives for this business and extract compensation from the traders/hackers for the systemic failure level of risk they introduce."

The number of listed companies in the US did shrink markedly in the last decade. Is it possible that all the financial engineering (derivatives, hedge funds, HFT, etc) has not added any value at all, in the contrary?

This is all very relevant also for Bursa Malaysia. Who do exchanges actually serve, who do they want to attract? Traders only interested in making short term profits, or genuine investors? And what kind of companies will they attract?

HFT: Flash crashes, dark pools, conflicts of interest ....

I have written a few times about High Frequency Trading (HFT), didn't plan to write much again, but then I came across this article from Barry Ritholtz, "Happy 2nd Anniversary, Flash Crash of 2010!".

This Sunday will mark the 2nd anniversary of the May 6th Flash Crash of 2010. As we all trade in this extremely low-volume environment, it is fitting that we recap where we stand today.

Listening to NYSE Euronext’s 1st quarter conference call yesterday, we shook our heads in dismay as management described a trading environment where volumes fell to a four and one half year low – the lowest levels since Reg NMS was implemented in late 2007, in fact.

NYSE’s Duncan Niederauer explained his 44% profit decline was due largely to a 25% decline in revenues from transactions from a year earlier. The culprit: An unfriendly environment for high frequency trading firms. From his point of view, regulators and folks in the media hyped the HFT bogey man too much, creating uncertainty, causing an HFT migration into other asset classes and geographies.

Niederauer doesn’t get it. He is mistaking the symptoms for the underlying problem. HFT volumes are down because investor volumes are down. Investor volumes are down because traditional retail and institutional buyers and sellers of stock have been steadily waking up to the dangers of drinking at the increasingly dangerous ”stock market watering hole.”

Like the animals on the Serengeti, who for years were accustomed to sipping long and heartily at their favorite spot, retail and institutional investors now see what’s beneath the surface. And they are deciding that the drink they crave is just not worth the risk.

More than $250 billion in long term equity funds has retreated from the markets since May 6th, 2010 – despite a slow but steady improvement in the economy and a stock market that has nearly doubled since the 2009 lows. It isn’t that these investors don’t have confidence in the economy. They don’t have confidence in our markets.

It isn’t hard to blame them. They have witnessed a radical transformation of the best capital allocation market system in the world, into one where:

- 13 stock exchanges cater to hyper traders who game the system, chasing exchange rebates, and leveraging speed for the purpose of a nanosecond scalping dance.
- More than 40 dark pools together trade more than 1/3rd of all shares.
- Conflicts of interest abound as exchanges own stakes in dark pools, and HFT firms own stakes in exchanges.
- Brokerage firm internalization of trades feeds the HFT financial modeling of investor orders.
- Exchange data feeds act as a veritable DVR of investor orders and behavior, the recording of which is then sold to HFTs.
- Rogue exchange traded products break down, trap unsophisticated investors, and only enrich the issuers, exchanges, and HFT firms that make markets in them.
- HFT firms in the last decade have achieved wondrous profitability (double-digit Sharpe ratios) while investors at best have clawed back to even.
- More than $1 billion in customer-segregated monies goes missing from MF Global, with not a single prosecution, nor a hope of redress.
As they witness all of the above, traditional retail and institutional investors see that our regulators must be having a challenging time acting as effective policemen in the marketplace:
- Flash orders, which give HFTs a quick peak at retail and institutional orders, are still alive and well, under many different names, despite a proposed banning of them in 2009.
- Dark pool regulation, also proposed years back, has not materialized.
- Internalizing brokerage/HFT firms, which clearly played a huge role in the market melt-down on May 6th (perhaps as well in the financial crisis in late 2008 and 2009) still practice the same way, with additional help from dark pools and exchanges who have all embraced “liquidity provider” programs.
- And finally, payment for order flow (PFOF) is alive and well on numerous levels throughout the system – from retail, to maker/taker exchange pricing, to free dark pool executions.

Investors know that the markets are broken. And they desperately want it fixed.

Our outrage over the transformation of the best capital markets in the world to this conflicted and fragmented web of chaos led us to write our book, Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio, which is being published by Financial Times Press.

When the book comes out June 3rd, it will find no shortage of critics from within our industry. However, we needed to write it. For years we have spoken about all of these issues in trade magazines and the financial media, and at industry conferences and panels, as well as with our regulators.

We wrote Broken Markets so that Main Street could understand what happened to our markets, to inspire change, so we can once again have the best capital markets in the world.

So, Happy Anniversary to everybody who made the Flash Crash happen. We hope you are enjoying yourself.

Because we, and millions and millions of other retail and institutional investors around the world, are not.

HFT: just another way Wall Street firms “screw over the little guy”?

Excellent article from "Macro Rants" about High Frequency Trading (HFT).

I strongly recommend to read the whole article, but the main points are:

• HFT trading creates lots of volume, but more volume is not prima facie better (unless you are collecting per-trade commissions on that volume, which is why Wall Street likes HFT).
• HFT trade systems “win” (aka profit) – but who loses (who pays)? Wall Street lobbyist like to argue that HFT is victimless, but if there was no profit in HFT why would anyone do it? It sounds too good to be true – and it is. We all pay for HFT trading – via exchange fees and false information about liquidity.
• Why don’t the exchanges lower their transaction fees for everyone, instead of marking up each trade and rebating a fraction of the mark-up to just the popular clique? HFT firms and stock exchanges essentially gouge the public on every trade, and split the spoils between themselves.
• "HFT adds no meaningful value to the public. It is a poorly veiled way for a privileged few to benefit from exchange transaction fees".

Do we really need HFT in Malaysia? Better give it a pass, I think. 


High frequency trading (HFT) has been in the news a lot lately, as the SEC tries to determine what additional regulations (if any) are required – and many in the public view, rightly or wrongly, that HFT is just another way Wall Street firms “screw over the little guy”.

I would argue that HFT is bad, not because it screws over the little guy (it may or may not) – but because HFT undermines the whole economic purpose of having markets in the first place: it obfuscates value (prices) rather than aiding value (price) discovery.

Lets step back for a minute and remember the reason why financial markets exist at all in capitalist economies. Providing liquidity is only one small part of the reason – if business owners want to sell their company (or part of it), they can do so without selling shares to the public. They don’t need an actively traded stock, or even a listed stock. Plenty of transactions are done between private entities, and most companies are actually sold (privately) to new owners – no financial markets involved at all. Many countries around the world have private companies, but they don’t have stock markets. In many others (including G7 countries), private company valuations are in aggregate many times the total market capitalization traded on exchanges.

The theoretical reason for having financial markets is to assign prices to large companies that (at least on average) equal the value of those companies. By assigning the “correct” price to each company, the markets direct finite capital to the places it can best serve society. Capital allocation is the reason why financial markets exist. Price discovery (as an approximation of value) is why financial markets exist.

The problem is that individual traders range from the very astute to the village idiot. Even the so-called experts can, and often do, make mistakes. Financial markets overcome this using “crowd wisdom”. Numerous studies have shown that a large crowd of people, each making estimates of a value, will usually beat even the so-called experts. Not just some of the time, but most of the time.

One frequently cited example is having a large group guess the number of marbles in a jar – the crowd average guess is usually very accurate even when experts guess wrong. There are still people who make crazy guesses (outliers), but on average the absurdly high and absurdly low guesses tend to cancel out. On average, the crowd gets it right – and usually beats even the experts who in theory should have an edge.
On average, a large crowd will estimate the correct value of a company as well, if not better, than the experts.

But crowd wisdom relies on several assumptions, perhaps the most crucial being that the bets are independent. If there is large scale collusion between crowd members, then essentially you no longer have a crowd, you merely have a handful of estimates that are just echoed by sub-groups. Outliers no longer cancel out, and the estimate becomes biased by a few guesses. Instead of having a true student government election, you have a handful of high school cliques. The popular clique “wins”, everyone else grumbles.

How does HFT fit into this? HFT is done by a computer sitting at the exchange data center. The computers are “co-located” because HFT strategies must be executed as fast as possible, they don’t think carefully what the company is actually worth – that is not part of their programming; it would take too long. For all the sales pitches and PR spin, most HFT algorithms are not all that different. They all use a moving average or two, an RSI indicator, and a list of pending trades (limit orders / market orders).  They really aren’t all that different from one another — except for execution speed.

Essentially, HFT is the popular clique. For much of 2009-2011, HFT trading represented as much as half of all market trades. Half the trades were not independent bets, and worse, they weren’t even guesses about the true value of the underlying companies. They were ultra-short term mean reversion trades (selling gamma) without regard to whether the short term mean was valid.

HFT trading creates lots of volume, but more volume is not prima facie better (unless you are collecting per-trade commissions on that volume, which is why Wall Street likes HFT). Volume has both a quantity and a quality component – and HFT has zero quality. HFT algorithms do not attempt to value the underlying company, they don’t have the time. One might argue the quality of HFT trade volume is negative – because it tends to dry up when markets are extra volatile, exactly when liquidity is most needed.

Why do exchanges pay for HFT trade flow? Where does that money come from? HFT trade systems “win” (aka profit) – but who loses (who pays)? Wall Street lobbyist like to argue that HFT is victimless, but if there was no profit in HFT why would anyone do it? It sounds too good to be true – and it is.

. . . .

We all pay for HFT trading – via exchange fees and false information about liquidity. What do we get in return? HFT systems are not required to balance order flow, as the old stock specialists on the NYSE used to do in return for their privileged market access. Getting 0.000001 higher price is legally a better execution – but practically speaking it is not. One has to trade 10,000 shares for the price difference to matter by a penny. Almost no one benefits from HFT in practical terms.

Why don’t the exchanges lower their transaction fees for everyone, instead of marking up each trade and rebating a fraction of the mark-up to just the popular clique? HFT firms and stock exchanges essentially gouge the public on every trade, and split the spoils between themselves. The HFT firm that gives the highest rebate back to the exchange gets to do the gouging.

. . . .

HFT adds no meaningful value to the public. It is a poorly veiled way for a privileged few to benefit from exchange transaction fees.

High Frequency Trading on Bursa Malaysia?

Article from The Malaysian Insider:

"Trading of equities on Bursa will be a new ballgame once computer-driven ultra-high frequency trading is introduced, said Edgar Perez, author and former Citigroup vice president.

High-speed trading already makes up six per cent of trades on the Bursa derivatives market and the stock exchange operator is reported to be gearing up for the introduction of ultra-fast trading of equities."

I am not a fan at all of High Frequency Trading (HFT), there are elements to it that are (in my opinion) not ethical. Is Bursa Malaysia seriously considering HFT? I am afraid they are:

"Bursa said in its 2011 financial results press conference that it expects growth in HFT as the new trading style, which is practised by elite hedge fund traders, is now in demand by the rest of the market."
Bursa Malaysia is now a listed company, retail investors are not very active anymore (like in the heydays of 1993) so Bursa might consider HFT to add to their profit.

There is no free lunch here, what HFT traders make, comes from other players, in this case the "normal" investors or traders, who get slightly worse prices on their trades.

Another article from Bloomberg is supposed to counter the fears that many (including me) have:

"High-Speed Trading Is Progress, Not Piracy".

I am not impressed, especially if I read statements like:

• "Their quote-and-cancel rates may be high"
• "Momentum ignition (in which traders take a position and then start rumors or place orders to quickly drive the market up or down) and layering (where traders place orders in the market-order books to imply substantial buying or selling pressure without the intention of executing) could both open the door to market manipulation".

I am probably an old fashioned guy, but for me things should be pretty simple:

• A company is an unique relationship between people who have time but no money (founders/managers, employees) and people who have money but no time (investors)
• Investors will receive shares, Founders/Managers will receive shares and wages, employees receive wages
• There are rules and regulations in place, and a regulator is holding a close watch to check if all is fair and square
• When there are many persons holding shares in one company, it makes sense to create an orderly market for the shares

I fail to see where HFT fits in the above.

I hope Bursa Malaysia will seriously consider the interests of all market participants before they make the decision to introduce HFT in Malaysia. It might be good for their bottom line, it might be good for trading volume, but it might alienate the retail investors even more.

I would recommend to just focus on the basics, and increase much needed enforcement, thereby bringing back confidence and credibility to the market. Retail investors will then return back, although it might take a long time.

Private investors lose, institutions win due to over-trading

Brad Barber, Yi-Tsung Lee, Yu-Jane Lui and Terrance Odean analysed the Taiwanese market and showed that individual private investor losses equated to a 3.8% penalty on their performance, equivalent to a giant 2.2% of Taiwan’s GDP each year between 1995 and 1999.

Their empirical analysis presents a clear portrait of who benefits from trade: Individuals lose, institutions win. While individual investors incur substantial losses, each of the four institutional groups that we analyze – corporations, dealers, foreigners, and mutual funds – gain from trade.

The research can be found here, it is a rather technical paper, the conclusion can be found on pages 19 and 20:

http://finance.martinsewell.com/traders/Barber-etal2006.pdf

A blog trying to estimate the damage for the US traders:

http://www.psyfitec.com/2012/01/160-billion-dollar-bezzle.html

The estimate by the blogger of the losses in the US is USD 160,000,000,000, an unbelievable high amount which I can't verify, but which might be roughly right.

I have written in the past about long term returns on the Bursa Malaysia:

http://cgmalaysia.blogspot.com/2011/09/bursa-long-term-returns.html

I estimated a loss of 1-2% per year due to trading (brokerage etc). Reviewing the above research I might have been too optimistic. Which means that my guess of 4-5% yearly returns is too high.

High Frequency Trading

http://whereiszemoola.blogspot.com/2011/08/and-who-is-ruling-wall-street.html

Very good warning from Ze Moola on High Frequency Trading and the like. My opinion in one word:

Madness!

"The computers have taken over Wall Street, and they're taking investors on a wild ride.This week, the Dow swung back and forth more than 400 points on four straight days. Trading volume is at or near record levels."

"High-frequency trading makes up 53% of all trading in U.S. stock markets, up from 21% in 2005, said Larry Tabb, president and CEO of market research firm Tabb Group. Other estimates put it even higher, at around 65%."

In my humble opinion, this is (partly) caused by the privatizations of the exchanges, pressuring them to make more and more money, not paying attention to much more important considerations like keeping integrity for all players involved. Certain parties have more (and earlier) information than others, simply unacceptable. These traders rent offices as close to the exchange as possible to minimize delays. The profits that both these trading outfits and the exchanges make are all derived from normal investors.

What has this to do with long term investing, creating value for shareholders and employees (including the management)?

It is about time these practices are stopped. Hopefully the local exchanges Bursa Malaysia and the Singapore Exchange (SGX) don't follow these bad examples and go "back to basics", what investing is all about.