By JOHN F. WASIK
MARCH 4, 2016
You have a significant retirement portfolio, it’s yours to manage and you have time on your hands. You’re a smart person and you’re sure you can beat the market — or at least do better than a boring basket of mutual funds and income investments.
That’s what Elmer Naples, 75, a former utility company engineer in Trenton, said he was thinking when he retired 20 years ago. Then the stock market started doing its trapeze act and he thought better of his plan and switched to a fee-only financial planner 10 years ago.
“I tried everything,” Mr. Naples recalled. “I owned stocks, mutual funds, C.D.s, bonds, diamonds and silver. I was handling all of our finances at first, then I got a little tired of the stock market. I wanted to put things on automatic.”
Like millions of retirees, Mr. Naples used his time to research investments that he hoped would preserve and increase his wealth. And like millions of others, he learned that it’s hard for an individual investor — even a retired one with lots of spare time — to outdo the pros and beat the market’s maddening volatility.
The Achilles’ heel for investors in retirement is a punishing stock market downturn that reduces not only their income stream but also their total wealth. Even the most astute individual investors have a hard time seeing bubbles inflating and knowing when to get out. They may even be part of the bubble inflation.
According to findings by the researchers Terrance Odean, Eduardo Andrade and Shengle Lin, investors naturally get excited by investing during bubbles and are often blinded by emotion. They may not understand how vulnerable they are when the bubble pops.
“Rapid, unexpected increases in wealth during the appreciation phase of asset pricing bubbles can lead investors to experience intense, positive emotions,” the researchers found. If they’re excited about, say, tech stocks, they buy more of them.
When markets turn sour, though, and professional investors are buying stocks whose prices have fallen, many individual investors retreat to the sidelines. For those in retirement, this is a sure way to underperform the market and often lose money. Because no one quite knows when it’s time to leave an inflated market or when to return and shop for bargains, millions of people guess wrong or follow the current trend. Market timing is a mug’s game.
Indeed, in the 2008-9 sell-off, willingness to take “above-average or substantial investment risk” fell to 19 percent in 2009 from 23 percent in mid-2008, according to the Investment Company Institute, a mutual fund trade group. The appetite for risk didn’t return to pre-crash levels until 2013 — and those who stayed out of the market missed most of the rebound in share prices of American stocks.
George A. Akerlof and Robert J. Shiller, Nobel laureates and the authors of “Phishing for Phools: The Economics of Manipulation and Deception,” call the siren call of Wall Street’s latest darlings “phishing.” That’s when a profit can be made off deception, enthusiasm, weakness and greed. Too many investors believe the narrative of the next best thing or easy money, derailing millions of retirement portfolios.
“It’s the world’s oldest story,” said Professor Akerlof, who is now at Georgetown University. “Someone’s always dangling an apple, and that snake decided to be there.”
When it comes to investing, he noted, people love stories. What company will make everyone’s life easier, connect the world and cure disease? “Stories get people to buy,” Professor Akerlof said. “But when the story goes viral — or becomes a New Yorker cartoon — it’s time to sell.”
How many retirees have the discipline to resist compelling narratives, especially when they have a lot of time to think about them? Not many, which builds a case for either studied self-discipline, such as a firm, long-term investment strategy, or employing an outside adviser.
In Mr. Naples’s case, after careful consideration he and his wife hired Len Hayduchok, a fee-based certified financial planner based in Hamilton, N.J., who set them up with a passively managed portfolio and counseled them on their financial and estate goals.
“For some folks, investing might be something they’re qualified to do,” Mr. Hayduchok said. “But many underestimate the expertise needed. The average investor gets returns that are half of the benchmark.”
At the very least, a qualified third party such as a financial planner or a registered investment adviser can take a lot of decisions off the table.
No longer will you have to worry about whether you are buying into a bubble or need to know when to get out. The focus will be on your long-term goals and not short-term headlines or manias. Besides, you stand little chance of success in an age of high-frequency trading and mountains of real-time information being absorbed by big traders every second of the day.
“Most normal buyers should do buy-and-hold,” Professor Akerlof recommended. He said he invested his own retirement money in index mutual funds.
“Adopt a strategy that’s ‘phool-proof’ and go for long-term investing,” he suggested. That means holding wide swaths of global stocks, bonds and real estate through mutual and exchange-traded funds sold by BlackRock (iShares), Dimensional Fund Advisors, Fidelity Investments, State Street Global Advisors (SPDRs), Charles Schwab and the Vanguard Group.
Still, investors might keep their hands in managing if they trade with no more than 10 percent of their portfolio. You may be able to insulate yourself by buying stocks with solid dividends and reinvesting the quarterly payments in new shares commission-free, through dividend reinvestment plans. You can often snag bargains when the market dips, as it did in the first weeks of this year.
For the bulk of your portfolio, how do you find a professional who will shield you from your worst instincts? Seek out a fiduciary — that is, someone legally obligated to put your best interests first. They should not receive a commission from selling you anything. They can charge by the hour, a flat fee or a percentage fee based on annual assets under management.
A financial planner, a chartered financial analyst or a personal financial adviser can draft and maintain a holistic financial plan that takes into account taxes, income,estate planning and other financial considerations. At the very minimum, a financial adviser who identifies, analyzes and respects your long-term goals — and keeps you on track — may be worth the investment.
Showing posts with label Trading. Show all posts
Showing posts with label Trading. Show all posts
Saturday, March 5, 2016
Wednesday, June 8, 2011
The urge to trade could hurt
Published June 8, 2011
New poll finds that 41% of Singapore's rich believe they have to trade frequently to make money, reports GENEVIEVE CUA
NUMEROUS academic studies show that frequent trading can be damaging to your wealth, but the affluent in Singapore may be oblivious to that.
A global survey by Barclays Wealth has found that 41 per cent of Singapore respondents - with at least £1 million (S$2 million) in wealth - believe they have to trade frequently to make money. Yet they also wish they had more self control.
Says Peter Brooks, Barclays Wealth behavioural finance analyst: 'People want more discipline. When you have sizeable wealth to manage, the lack of discipline can be pretty harmful . . . Because people trade frequently, the returns they achieve can be lower than when they buy and hold.'
Barclays polled 2,000 wealthy individuals globally for the study, Risks and Rules: The Role of Control in Financial Decision Making. There were 500 respondents from the Asia-Pacific, and Singapore accounted for a fifth of that, or 100.
The report looks into different financial personality traits among the wealthy, and the self-imposed rules and strategies they use to deal with those traits. It says 'emotional' trading can cost investors nearly 20 per cent in returns over a 10-year period. Those who use some control strategies, however, have an average 12 per cent more wealth than those who do not use rules.
Control strategies include a cooling-off period that is typically a feature of investments funds, or a self-imposed practice of waiting a few days before making a decision. Yet another strategy is to set deadlines to avoid procrastination.
In Hong Kong, the proportion who feel they need to trade frequently is 46 per cent. The global average is 32 per cent; and those individuals are also three times as likely to think they trade too much. In Hong Kong, 55 per cent believe they are over-trading, compared to just 15 per cent among Singapore respondents.
Not surprisingly, 47 per cent of Singapore respondents are willing to bear high levels of risk to achieve higher returns. But 61 per cent are actually more concerned with preventing bad things happening than ensuring that good things happen.
'There's a slight disconnect between how people think about taking risk and achieving returns, and their focus on prevention. Those (elements) shouldn't really exist together; there is tension between the two.
'If you go down that road, you could become very stressed which can lead to a poor financial experience.'
Singapore respondents, in fact, report that they are more likely than their global counterparts to become stressed. They are also less likely to delegate financial decision making.
Paradoxically, the Singapore wealthy are the most satisfied with their financial situation (76 per cent) compared to the rest of Asia. The proportion in Hong Kong who are satisfied is 55 per cent, and in Japan it is 52 per cent.
Mr Brooks says the findings suggest that wealth managers have opportunities to provide advice on investment discipline and reduce the damaging effects of over-trading. 'Asset allocation and diversification are great for the long run but for individual investors the route along the way is important.'
Almost half of Singapore respondents wish they had more control over their financial behaviour, compared to the global average of 41 per cent. Globally, the need for increased financial discipline is likely to be felt by those at the wealthiest end of the scale (more than £10 million in wealth).
An earlier Barclays study found that 73 per cent of Singapore respondents felt financially responsible for their children - the highest in Asia. Mr Brooks said: 'These findings reflect the fact that Singapore HNWIs may let their emotions influence their investment decisions because of a deep sense of family. Even though local investors historically focus on careful planning, they should not shy away from seeking financial counsel.
'In many cases it may not only help them pass on wealth to future generations, but possibly grow their wealth by providing alternative investment options that are aligned to their personalities.'
New poll finds that 41% of Singapore's rich believe they have to trade frequently to make money, reports GENEVIEVE CUA
NUMEROUS academic studies show that frequent trading can be damaging to your wealth, but the affluent in Singapore may be oblivious to that.
A global survey by Barclays Wealth has found that 41 per cent of Singapore respondents - with at least £1 million (S$2 million) in wealth - believe they have to trade frequently to make money. Yet they also wish they had more self control.
Says Peter Brooks, Barclays Wealth behavioural finance analyst: 'People want more discipline. When you have sizeable wealth to manage, the lack of discipline can be pretty harmful . . . Because people trade frequently, the returns they achieve can be lower than when they buy and hold.'
Barclays polled 2,000 wealthy individuals globally for the study, Risks and Rules: The Role of Control in Financial Decision Making. There were 500 respondents from the Asia-Pacific, and Singapore accounted for a fifth of that, or 100.
The report looks into different financial personality traits among the wealthy, and the self-imposed rules and strategies they use to deal with those traits. It says 'emotional' trading can cost investors nearly 20 per cent in returns over a 10-year period. Those who use some control strategies, however, have an average 12 per cent more wealth than those who do not use rules.
Control strategies include a cooling-off period that is typically a feature of investments funds, or a self-imposed practice of waiting a few days before making a decision. Yet another strategy is to set deadlines to avoid procrastination.
In Hong Kong, the proportion who feel they need to trade frequently is 46 per cent. The global average is 32 per cent; and those individuals are also three times as likely to think they trade too much. In Hong Kong, 55 per cent believe they are over-trading, compared to just 15 per cent among Singapore respondents.
Not surprisingly, 47 per cent of Singapore respondents are willing to bear high levels of risk to achieve higher returns. But 61 per cent are actually more concerned with preventing bad things happening than ensuring that good things happen.
'There's a slight disconnect between how people think about taking risk and achieving returns, and their focus on prevention. Those (elements) shouldn't really exist together; there is tension between the two.
'If you go down that road, you could become very stressed which can lead to a poor financial experience.'
Singapore respondents, in fact, report that they are more likely than their global counterparts to become stressed. They are also less likely to delegate financial decision making.
Paradoxically, the Singapore wealthy are the most satisfied with their financial situation (76 per cent) compared to the rest of Asia. The proportion in Hong Kong who are satisfied is 55 per cent, and in Japan it is 52 per cent.
Mr Brooks says the findings suggest that wealth managers have opportunities to provide advice on investment discipline and reduce the damaging effects of over-trading. 'Asset allocation and diversification are great for the long run but for individual investors the route along the way is important.'
Almost half of Singapore respondents wish they had more control over their financial behaviour, compared to the global average of 41 per cent. Globally, the need for increased financial discipline is likely to be felt by those at the wealthiest end of the scale (more than £10 million in wealth).
An earlier Barclays study found that 73 per cent of Singapore respondents felt financially responsible for their children - the highest in Asia. Mr Brooks said: 'These findings reflect the fact that Singapore HNWIs may let their emotions influence their investment decisions because of a deep sense of family. Even though local investors historically focus on careful planning, they should not shy away from seeking financial counsel.
'In many cases it may not only help them pass on wealth to future generations, but possibly grow their wealth by providing alternative investment options that are aligned to their personalities.'
The affluent and the trading paradox
Published June 8, 2011
(NEW YORK) For nearly all investors, frequent trading is a terrible proposition. Many people know they trade more than they should - but they just can't stop.
The fundamental problem with frequent trading is that very few people can consistently outsmart the market - at least not while playing by the rules.
Behavioural biases lead many of us to trade at the wrong times. It can be comforting, for example, to buy when stocks are rising and nearly irresistible to sell when they are plummeting, as US stocks did last week. This means buying high and selling low, a fine recipe for financial misery.
Furthermore, when costs mount, as they will when you trade frequently, the odds of beating the market are slim indeed.
It's been long known that these kinds of mistakes have serious consequences. A study by Dalbar, a mutual fund research firm in Boston, found that in the 20 years through December, the average stock fund investor had annualized returns of 3.8 per cent, compared with 9.1 per cent for the Standard & Poor's 500-stock index. The average person, in short, would have been much better off buying an index fund and holding it for 20 years.
Now, a new study shows that many well-heeled and apparently well-informed people feel compelled to trade frequently - while believing that their trading is excessive (see story above).
The existence of this 'trading paradox' is a central finding of the study, which was conducted by Barclays Wealth, a division of Barclays, the global bank based in London.
'This trading paradox exists, to one degree or another, everywhere in the world,' Greg Davies, the head of behavioural and quantitative finance at Barclays Wealth, said in a telephone interview. 'Not everyone is prone to frequent trading, but among those who feel that they must trade frequently to do well, there is a substantial proportion who are troubled by their behaviour. This is a novel finding for me.'
At the core of the study was a survey of more than 2,000 affluent people around the world conducted in January and February by Ledbury Research, a market research firm based in London. Participants were people whose net worth met a minimum threshold - for example, in Britain, it was £1 million (S$2 million).
The survey asked participants a series of questions about their behaviour. It found that 40 per cent said they practise market timing rather than stick to a buy- and-hold strategy.
The market timers were 'over three times more likely to believe they trade too much', the study said. Nearly half of those who said that 'you have to buy and sell often' to do well also said 'I buy and sell investments more than I should'.
How is it that so many people hold apparently contradictory views, believing both that frequent trading is beneficial and that they trade too much for their own good? The answer isn't simple, the study said.
'On the face of it,' it said, 'you might think that those who were trading more actively would be more experienced, sophisticated and able to control themselves, but that seems not to be the case - trading becomes addictive.'
In fact, the study found, 'the basic problem is that investors feel they need to engage in active trading, but they cannot then control how much they do it'. Much like overeating, over the top trading isn't easily curbed, Mr Davies said.
Overall, nearly half of the investors said they needed more self-control. Strategies like setting deadlines to avoid procrastination and using cooling-off periods to reflect on decisions were widely used, the study found.
Men were more likely to say they engage in market timing than women - 41 per cent of men versus 36 per cent of women. That's in line with research suggesting that women are generally more careful and consistent investors than men. Women were far less likely to say they overtrade - with only 11 per cent of women saying they do, versus 17 per cent of men.
Based on data collected for the survey, anyway, the US looks like a fairly sensible place. Only about a quarter of American investors said they engaged in market timing compared with about half globally. Only 8 per cent said they traded too frequently, compared with 16 per cent globally.
The reasons for this aren't entirely clear. Mr Davies said it may be that affluent people in the US have had more time to grow accustomed to dealing with wealth than, say, people in an emerging market like Malaysia. -- NYT
(NEW YORK) For nearly all investors, frequent trading is a terrible proposition. Many people know they trade more than they should - but they just can't stop.
The fundamental problem with frequent trading is that very few people can consistently outsmart the market - at least not while playing by the rules.
Behavioural biases lead many of us to trade at the wrong times. It can be comforting, for example, to buy when stocks are rising and nearly irresistible to sell when they are plummeting, as US stocks did last week. This means buying high and selling low, a fine recipe for financial misery.
Furthermore, when costs mount, as they will when you trade frequently, the odds of beating the market are slim indeed.
It's been long known that these kinds of mistakes have serious consequences. A study by Dalbar, a mutual fund research firm in Boston, found that in the 20 years through December, the average stock fund investor had annualized returns of 3.8 per cent, compared with 9.1 per cent for the Standard & Poor's 500-stock index. The average person, in short, would have been much better off buying an index fund and holding it for 20 years.
Now, a new study shows that many well-heeled and apparently well-informed people feel compelled to trade frequently - while believing that their trading is excessive (see story above).
The existence of this 'trading paradox' is a central finding of the study, which was conducted by Barclays Wealth, a division of Barclays, the global bank based in London.
'This trading paradox exists, to one degree or another, everywhere in the world,' Greg Davies, the head of behavioural and quantitative finance at Barclays Wealth, said in a telephone interview. 'Not everyone is prone to frequent trading, but among those who feel that they must trade frequently to do well, there is a substantial proportion who are troubled by their behaviour. This is a novel finding for me.'
At the core of the study was a survey of more than 2,000 affluent people around the world conducted in January and February by Ledbury Research, a market research firm based in London. Participants were people whose net worth met a minimum threshold - for example, in Britain, it was £1 million (S$2 million).
The survey asked participants a series of questions about their behaviour. It found that 40 per cent said they practise market timing rather than stick to a buy- and-hold strategy.
The market timers were 'over three times more likely to believe they trade too much', the study said. Nearly half of those who said that 'you have to buy and sell often' to do well also said 'I buy and sell investments more than I should'.
How is it that so many people hold apparently contradictory views, believing both that frequent trading is beneficial and that they trade too much for their own good? The answer isn't simple, the study said.
'On the face of it,' it said, 'you might think that those who were trading more actively would be more experienced, sophisticated and able to control themselves, but that seems not to be the case - trading becomes addictive.'
In fact, the study found, 'the basic problem is that investors feel they need to engage in active trading, but they cannot then control how much they do it'. Much like overeating, over the top trading isn't easily curbed, Mr Davies said.
Overall, nearly half of the investors said they needed more self-control. Strategies like setting deadlines to avoid procrastination and using cooling-off periods to reflect on decisions were widely used, the study found.
Men were more likely to say they engage in market timing than women - 41 per cent of men versus 36 per cent of women. That's in line with research suggesting that women are generally more careful and consistent investors than men. Women were far less likely to say they overtrade - with only 11 per cent of women saying they do, versus 17 per cent of men.
Based on data collected for the survey, anyway, the US looks like a fairly sensible place. Only about a quarter of American investors said they engaged in market timing compared with about half globally. Only 8 per cent said they traded too frequently, compared with 16 per cent globally.
The reasons for this aren't entirely clear. Mr Davies said it may be that affluent people in the US have had more time to grow accustomed to dealing with wealth than, say, people in an emerging market like Malaysia. -- NYT
Tuesday, January 25, 2011
High Frequency Trading: natural evolution or another scam?
Published January 25, 2011
By R SIVANITHY
EVOLUTION is supposed to be a natural developmental process which after completion results in the end-product being more advanced, sophisticated and somehow 'better' than what existed before.
In the financial markets, high-frequency trading (HFT) is seen as being part of natural evolution towards greater sophistication. The argument here is essentially 'faster is better' because everyone knows that time is money and speed is of the essence.
This is the preferred portrayal by investment banks, brokers and also exchanges everywhere. The Singapore Exchange (SGX), for example, announced last week it is launching the world's fastest trading engine in August as it looks to compete with other exchanges which have been busy upgrading their trading software.
Most people, however, also acknowledge that some trade-offs are inevitable in the quest for this sort of sophistication. The main one is that retail investors don't have large and powerful super-computers at their disposal and could therefore be disadvantaged. To help them, some form of regulation is needed. So it is that much of the regulatory discussion on HFT revolves around circuit breakers that would halt trading in the event of a high-speed crash.
Retail investors are also offered an alternative. For those not prepared to pit their wits against big computers which can react in a millionth of a second, they are offered passive investment in exchange traded funds (ETFs) or unit trusts, both of which are abundantly available and ever-hungry for retail business.
Our worry is that not enough thought or publicity has gone into just how radically HFT has changed the investment game. Few people realise it but unless fund and ETF managers also have super-sophisticated computers to compete on the same terms as HFT traders, they too could well be on the losing end of most trades.
Zero-sum game
According to a recent news report, traders at JPMorgan and Bank of America last year made a profit every single day for two entire quarters. How is this possible? If you accept that trading is a zero-sum game, then who lost? Most likely it was retail investors and probably a bunch of institutions which don't possess adequate computing power. Is buying unit trusts or passive investing really the ideal solution for the small investor?
To put it bluntly, circuit breakers don't offer much protection in a playing field tilted heavily in favour of HFT traders. And relying on listed, commercially-driven exchanges like SGX to formulate useful policies that would level the playing field would be a mistake because exchanges and regulators themselves are not sure what's best.
Consider that ever since the trend towards demutualisation started a decade or so ago, exchanges - like all listed companies - have been driven by a need to maximise shareholder wealth. This used to take mainly two forms: getting companies to list (and thereby collecting listing fees), and by encouraging active trading (and thereby collecting clearing fees, stamp duties, etc). Both activities were not necessarily mutually exclusive since companies that listed would be happy to see their shares actively traded.
Enter HFT, which has only one goal in mind: to make as much money as possible by exploiting weaknesses and/detecting trends before anyone else. (In the US, the average speed of a trade on NYSE Euronext is now reported to be 0.7 of a second or less, compared to 10.1 seconds in 2005 - when it was still the NYSE - while the average trade size has dropped from 724 shares to 268 shares.)
HFT traders have been described as 'valuation agnostic' - that is, they are indifferent to fundamentals or valuations and are concerned only with exploiting money flows and weaknesses.
Short-term trading
There are many strategies employed - for example, some use 'pattern recognition' (which may well be a euphemism for front-running) to detect changes in institutional flows and to buy or sell ahead of those flows while others earn rebates from exchanges for trading in high volumes; so the more liquidity they generate, the better.
However, all seek to square off their positions by the end of each session, so there is as little overnight exposure as possible.
In a nutshell, with HFT, stock markets are now predominantly populated by very short-term traders who can identify trends faster than most others and can react before the blink of an eye.
Profit-driven exchanges are keen to encourage this sort of activity because of the volume it creates and the money it adds to their coffers. But, in time, this can only lead to a near-total marginalisation of the retail investor.
More HFT may also lead to fewer good-quality companies listing since the activity does not concern itself with fundamentals - only with trends, liquidity and momentum. If so, a possible scenario is that, over time, mainly speculative-grade firms will be taken public or remain listed - which would then aggravate the short-termism already in place.
How might profit-driven exchanges like SGX then reconcile the need to ramp up trading volume by having more volume with their other role of encouraging more listings?
At this time, it looks very much that HFT benefits mainly the few - namely the large investment banks which have access to extremely powerful computers.
When you think about it, these are the same people who brought about the 2008 sub-prime mortgage crisis when they scammed the world with their new and 'improved' structured products, all of which eventually collapsed.
So does HFT really equate with evolution and its associated 'new and improved' connotations? Or is it simply another scam peddled by the big houses which have to find ways to keep their profits up?
Or, more insidiously, does one naturally lead to the other?
By R SIVANITHY
EVOLUTION is supposed to be a natural developmental process which after completion results in the end-product being more advanced, sophisticated and somehow 'better' than what existed before.
In the financial markets, high-frequency trading (HFT) is seen as being part of natural evolution towards greater sophistication. The argument here is essentially 'faster is better' because everyone knows that time is money and speed is of the essence.
This is the preferred portrayal by investment banks, brokers and also exchanges everywhere. The Singapore Exchange (SGX), for example, announced last week it is launching the world's fastest trading engine in August as it looks to compete with other exchanges which have been busy upgrading their trading software.
Most people, however, also acknowledge that some trade-offs are inevitable in the quest for this sort of sophistication. The main one is that retail investors don't have large and powerful super-computers at their disposal and could therefore be disadvantaged. To help them, some form of regulation is needed. So it is that much of the regulatory discussion on HFT revolves around circuit breakers that would halt trading in the event of a high-speed crash.
Retail investors are also offered an alternative. For those not prepared to pit their wits against big computers which can react in a millionth of a second, they are offered passive investment in exchange traded funds (ETFs) or unit trusts, both of which are abundantly available and ever-hungry for retail business.
Our worry is that not enough thought or publicity has gone into just how radically HFT has changed the investment game. Few people realise it but unless fund and ETF managers also have super-sophisticated computers to compete on the same terms as HFT traders, they too could well be on the losing end of most trades.
Zero-sum game
According to a recent news report, traders at JPMorgan and Bank of America last year made a profit every single day for two entire quarters. How is this possible? If you accept that trading is a zero-sum game, then who lost? Most likely it was retail investors and probably a bunch of institutions which don't possess adequate computing power. Is buying unit trusts or passive investing really the ideal solution for the small investor?
To put it bluntly, circuit breakers don't offer much protection in a playing field tilted heavily in favour of HFT traders. And relying on listed, commercially-driven exchanges like SGX to formulate useful policies that would level the playing field would be a mistake because exchanges and regulators themselves are not sure what's best.
Consider that ever since the trend towards demutualisation started a decade or so ago, exchanges - like all listed companies - have been driven by a need to maximise shareholder wealth. This used to take mainly two forms: getting companies to list (and thereby collecting listing fees), and by encouraging active trading (and thereby collecting clearing fees, stamp duties, etc). Both activities were not necessarily mutually exclusive since companies that listed would be happy to see their shares actively traded.
Enter HFT, which has only one goal in mind: to make as much money as possible by exploiting weaknesses and/detecting trends before anyone else. (In the US, the average speed of a trade on NYSE Euronext is now reported to be 0.7 of a second or less, compared to 10.1 seconds in 2005 - when it was still the NYSE - while the average trade size has dropped from 724 shares to 268 shares.)
HFT traders have been described as 'valuation agnostic' - that is, they are indifferent to fundamentals or valuations and are concerned only with exploiting money flows and weaknesses.
Short-term trading
There are many strategies employed - for example, some use 'pattern recognition' (which may well be a euphemism for front-running) to detect changes in institutional flows and to buy or sell ahead of those flows while others earn rebates from exchanges for trading in high volumes; so the more liquidity they generate, the better.
However, all seek to square off their positions by the end of each session, so there is as little overnight exposure as possible.
In a nutshell, with HFT, stock markets are now predominantly populated by very short-term traders who can identify trends faster than most others and can react before the blink of an eye.
Profit-driven exchanges are keen to encourage this sort of activity because of the volume it creates and the money it adds to their coffers. But, in time, this can only lead to a near-total marginalisation of the retail investor.
More HFT may also lead to fewer good-quality companies listing since the activity does not concern itself with fundamentals - only with trends, liquidity and momentum. If so, a possible scenario is that, over time, mainly speculative-grade firms will be taken public or remain listed - which would then aggravate the short-termism already in place.
How might profit-driven exchanges like SGX then reconcile the need to ramp up trading volume by having more volume with their other role of encouraging more listings?
At this time, it looks very much that HFT benefits mainly the few - namely the large investment banks which have access to extremely powerful computers.
When you think about it, these are the same people who brought about the 2008 sub-prime mortgage crisis when they scammed the world with their new and 'improved' structured products, all of which eventually collapsed.
So does HFT really equate with evolution and its associated 'new and improved' connotations? Or is it simply another scam peddled by the big houses which have to find ways to keep their profits up?
Or, more insidiously, does one naturally lead to the other?
Thursday, July 23, 2009
Stock Traders Find Speed Pays, in Milliseconds
By CHARLES DUHIGG
Published: July 23, 2009
It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.
It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.
Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.
These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.
Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.
And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.
Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.
“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”
For most of Wall Street’s history, stock trading was fairly straightforward: buyers and sellers gathered on exchange floors and dickered until they struck a deal. Then, in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea.
But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.
High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.
High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.
“It’s become a technological arms race, and what separates winners and losers is how fast they can move,” said Joseph M. Mecane of NYSE Euronext, which operates the New York Stock Exchange. “Markets need liquidity, and high-frequency traders provide opportunities for other investors to buy and sell.”
The rise of high-frequency trading helps explain why activity on the nation’s stock exchanges has exploded. Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive, stock exchanges say that a handful of high-frequency traders now account for a more than half of all trades. To understand this high-speed world, consider what happened when slow-moving traders went up against high-frequency robots earlier this month, and ended up handing spoils to lightning-fast computers.
It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.
The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.
In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.
Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.
The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.
Multiply such trades across thousands of stocks a day, and the profits are substantial. High-frequency traders generated about $21 billion in profits last year, the Tabb Group, a research firm, estimates.
“You want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient,” said Andrew M. Brooks, head of United States equity trading at T. Rowe Price, a mutual fund and investment company that often competes with and uses high-frequency techniques. “But we’re moving toward a two-tiered marketplace of the high-frequency arbitrage guys, and everyone else. People want to know they have a legitimate shot at getting a fair deal. Otherwise, the markets lose their integrity.”
Published: July 23, 2009
It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.
It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.
Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.
These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.
Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.
And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.
Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.
“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”
For most of Wall Street’s history, stock trading was fairly straightforward: buyers and sellers gathered on exchange floors and dickered until they struck a deal. Then, in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea.
But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.
High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.
High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.
“It’s become a technological arms race, and what separates winners and losers is how fast they can move,” said Joseph M. Mecane of NYSE Euronext, which operates the New York Stock Exchange. “Markets need liquidity, and high-frequency traders provide opportunities for other investors to buy and sell.”
The rise of high-frequency trading helps explain why activity on the nation’s stock exchanges has exploded. Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive, stock exchanges say that a handful of high-frequency traders now account for a more than half of all trades. To understand this high-speed world, consider what happened when slow-moving traders went up against high-frequency robots earlier this month, and ended up handing spoils to lightning-fast computers.
It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.
The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.
In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.
Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.
The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.
Multiply such trades across thousands of stocks a day, and the profits are substantial. High-frequency traders generated about $21 billion in profits last year, the Tabb Group, a research firm, estimates.
“You want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient,” said Andrew M. Brooks, head of United States equity trading at T. Rowe Price, a mutual fund and investment company that often competes with and uses high-frequency techniques. “But we’re moving toward a two-tiered marketplace of the high-frequency arbitrage guys, and everyone else. People want to know they have a legitimate shot at getting a fair deal. Otherwise, the markets lose their integrity.”
Saturday, July 19, 2008
High Probability Trading: Take the Steps to Become a Succesful Trader
by Marcel Link
Content
The Tuition of Trading
Setting Realistic Goals
Leveling the Playing Field
Trading the News
Increasing your Chances with Multiple Time Frames
Trading with the Trend
Using Oscillators
Breakout and Reversals
Exits and Stops
Making the High Prabability Trade
The Trading Plan & Game plan
System Trading
A Little about Backtesting
Employing a Money Management Plan
Setting Risk Parameters and Making a Money Management Plan
Discipline: The Key to Success
The Dangers of Overtrading
The Innerside of Trading: Keeping a Clear Mind
A Trader who has a Good Chance at Success has the following attributes.
Is properly capitalized
Treats trading like a business
Has a low tolerance for risk
Trades only when the market provides an opportunity
Can control emotions
Has a trading plan
Has a risk management plan
Is incredibly disciplined
Is focused
Has backtested his trading methodology
A Trader who has a Good Chance at Failure has any of the following attributes.
Is under capitalized
Lack discipline
Overtrades
Does not understand the markets
Rushes into the trades
Chases the market
Is afraid of missing a move
Is stubborn and marries a position or ideas
Misinterprets news
Is always looking for home runs
Let losers get too big
Takes winners prematurely
Takes trading too lightly
Takes large risks
Has little control of his emotions
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