High-frequency trading

High-frequency trading is creating a ruckus on Wall Street. Marketplace Senior Editor Paddy Hirsch explains what high-frequency trading is and why some people are up in arms about it.

Hostile takeovers

We all know what a takeover is. That's when one company agrees to be bought by another. But what happens when companies don't agree and the takeover goes hostile? Senior Editor Paddy Hirsch explains.

Credit default swaps? They're complicated -- and scary! The receipt you get when you pre-order your Thanksgiving turkey? Not so much. But they have a lot in common: They're both derivatives. Senior Editor Paddy Hirsch explains.

Bonds, notes and bills

So much government debt! But what's the difference between the Treasury's bills, notes and bonds? Senior Editor Paddy Hirsch explains.

Inflation

Most economists agree that inflation of about 2% or 3% annually is a natural function of a growing economy. But people are worried government stimulus measures could spark much higher inflation. Senior Editor Paddy Hirsch explains

High-frequency trading

High-frequency trading is creating a ruckus on Wall Street. Marketplace Senior Editor Paddy Hirsch explains what high-frequency trading is and why some people are up in arms about it.

Factoring

Many small businesses get the cash they need to operate and expand from so-called factors. One of the biggest factors in the business is CIT, and with CIT on the ropes, small businesses are worried. Senior Editor Paddy Hirsch explains what factoring is, and how it works.

Comments

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By Indranil Bhattacharya

From New Delhi, India, 11/20/2009

I look forward Paddy Hirsh's whiteboards. They are so simple yet covers teh subject so well.
However in this case, I think he started off very well explaining HFT but lost out in the middle.
* Should have explained how a $24.5 bid is met by $25 ask.
* Program trading needs more explaining
* Good example on Flash trading - Very simple for a street guy
* Can we have a session on the type of algos these 'v.intelligent' techies in the wall street creates.

By Don Hall

From Richmond, VA, 08/27/2009

Thanks for the report.
I am so tired of people leaking money out of the economy in ways such as this. An investment is supposed to support the work of others in industry, then all share in money made out on the street. When an "investment" makes money by teasing industry with churned money, there is only benefit to the churner, and industry withers and dies.

By p h

From FL, 08/27/2009

I enjoyed the presentation by Mr. Hirsch but he perpetuates the myth that the people who write these algorithms are very intelligent and therefore very expensive. Having been a research director for major Wall Street firms and having been quoted in major finance journals I think I have a bit of a grasp on this crowd's general level of sophistication. Most of this stuff is not rocket science, and the vast majority of these programmers, developers and researchers are paid huge sums simply because the firms make large amounts of money on the back of increasingly opaque instruments and techniques. There are just as intelligent people elsewhere. Reports (like this one) stating that those involved in quantitative trading techniques are somehow at the top of the intelligence chain are vastly exaggerated.

By Philip Roe

From Ann Arbor, 08/26/2009

I listened with fascination and dismay to your piece on high-frequency trading. The relationship between a market and the society in which it thrives is that between a parasite and its host, mutually beneficial provided that it remains in balance. Adam Smith's invisible hand assumes that self-interested trading is of benefit both the society and the market. But society benefits from the well-considered direction of resources, but individual traders benefit from anticipating the decisions of other traders, even by milliseconds. Trading faster benefits noone but the traders. Could you please ask somebody what the social gain is from high-frequency trading? If they say that it creates a more efficient market, could you then ask them to define efficiency very carefully? Phil Roe

By Tom Benner

From MD, 08/26/2009

This is just another example of how capitalism has changed for the worse. Creating something has been substituted for creating nothing. How does this help the economy grow, help Americans, help the world? It doesn't! Why does the SEC allow this practice?

By B. M.

From LA, CA, 08/26/2009

OK job on the explanation, but he used a very bad example. So this video really doesn't explain how the fast-trader makes money on the $24.50 bid $25.00 ask trades. Unrealistic to think spreads are so wide that a flash order to sell at $27.00 would be met with anything other than delivery to a long stack of lazy orders in the system, same for $26.00 order to sell. Give people a realistic example, we aren't dummies.

I also don't buy that the fast-traders can't tell the orders are coming from the same buyer. There's SOME anonymity to the order postings, but there's also some id/traction on the buyer depending on the exchange. So you should also use real exchanges in your examples.

Also, you make it seem like these "algorythms" are so complicated, no one bother to explain them. They aren't that complicated, I assure you, no more than some options math which most people with a business degree (95% of Wall Streeters and a good percentage of Main Streeters) can understand.

So overall I give this video a 3 stars out of 5. A 10 year old child should be able to understand this stuff, it's really not that hard how big Wall Street firms clip money off institutional and retail orders. Institutions ought to get a GOOD 5-star explanation for all the money they are paying middlemen, THEN maybe you'd get some market solutions, instead of crying to the government-- whom will inevitably botch this thing up even worse than it already is. After all, where do you think politicians get their money? That's right, from the guys making all the easy money. So don't expect anything good to happen if gov't intervenes, it'll be more of the same, and worse.

There is only one solution, and that's to offer a market with truly opaque order flow, with only one settlement engine for matched orders. Unfortunately, the existance of such markets have been tried in the past, and the liquidity directors (big banks) direct their volumes elsewhere, to other markets that don't prevent them from making the easy money. So unless I'm missing something, nothing will ever change.

The best thing to do is for the gov't to let big banks fail when they screw up. At least it gives more honest hard-working firms some reward for doing a better job for customers. What we did in the past year is deplorable, handing the bandits bullets. I prefer new bandits, the old ones need to learn their lesson which greed bestows on them.

By Mark McBride

08/18/2009

I googled "liquidity rebate" to find out more and found many results saying the NYSE started offering liquidity rebates March 1 2009. Did they get rid of it again or was that part of the whiteboard incorrect?

PS- I

By Dennis Sevilla

From Los Angeles, CA, 08/18/2009

Paddy Hirsch needs to do one of his pieces about the reimbursement system in the health care industry. The Relative Based Reimbursment Value System RBRVS)is used by major insurance companies to reimburse providers. The reimbursement by those private payors is always same or lower than Medicare because they use the Medicare RBRVS fee schedule. We hear in the media a lot that insurance companies reimburse 30% more than Medicare which is not true and impossible when they use the same RBRVS system.
Paddy, it will be interesting with your skills.....
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