How can the individual investor compete with that?
A: Don't try. Holding stocks a long amount of time insulates you from the market-timing nonsense where the day traders are fighting tooth and nail for fractions of a percentage point of profit.
Yeah, it seems with high speed algorithmic trading your larger competitors are always going to have faster machines, better connections and likely many many programmers just as smart or smarter than you are.
Warning, that page has a flash ad that autoplays with very annoying audio, turn down your speakers before you click the link or you'll wake up the whole house.
In fact, don't bother clicking here is the whole text of the 'article':
"What, you bought a stock one whole hour ago? And you still own it? That stock is practically a dinosaur in Wall Street's new reality.
The average time a stock is held is 22 seconds. But that's an improvement from a year ago, when it was 20 seconds, according to analyst Michael Hudson, an economics professor at the University of Missouri.
It's all because of computerized split-second trading. "The financial sector is short term," Hudson said in an interview. "They talk as if they're long term."
Wired has an excellent overview of how computerized trading has taken over Wall Street. It's so bad now, in fact, that computers now read news articles at lightning speed, searching for key words that will help them buy stocks.
"The machines aren't there just to crunch numbers anymore; they're now making the decisions," Wired reports. Computerized high-frequency trading makes up about 70% of all trades, experts say.
How can the individual investor compete with that?
I understand when people copy the content of some blog post the author submitted to HN while a server is too overloaded to read it at the source.
I don't understand you copying the full text of an MSN news article because you don't like the advertising. Please respect copyright a little bit. If you don't respect copyright, at least respect Paul and don't create reasons for lawyers to send him DMCA infringement notices.
So it's ok to copy blog posts because a server is overloaded but not ok to copy a 5 line article from MSN half of those five lines were copied by MSN from wired, two more were from an interview elsewhere (http://www.therealnews.com/t2/index.php?option=com_content&#... warning, also auto plays some ad, sorry) and whose sole original contribution seems to be to deliver some auto-play ad?
Compare this to Mr. Buffett, who has been quoted as saying:
"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."
Yes, his strategy is about the opposite. It relies on doing very good stock picking and then holding the stocks for a long time.
I wonder if buy and hold is as good of a strategy now as it was back when he started. He had the luck to start at a time from which there was a decades-long growth in the stock market.
Size is Buffett's anchor now. If you give him a small amount of money, say $50Million, I think he'd do wonders with it.
I model my investing style after what he was doing about 10 years into his career and its worked out well for me with very little stress. The only reason I sell is if I find something that looks like a better value, but even if I'm right to move elsewhere the taxes make me question my decision every time.
How did they get this data on stock trades? I would love to take a look at that it. And instead of an average, I'd like to see a histogram. I bet there are a lot of very quick trades and a lot of people/companies that hold onto stocks for months or years.
"In recent years, what is known as high-frequency trading — rapid automated buying and selling — has taken off and now accounts for 50 to 75 percent of daily trading volume."
From what I've read, its gotten pretty ridiculous overall.
However, doing things like producing a histogram or tracking the individual numbers for a given fund require that you be able to identify individual traders, which is generally not possible. Funds will route their orders through brokers specifically to anonymize them, often slicing a given order up into many sub-orders so that it can be spread across multiple brokers. The golden rule of the financial industry is to never ever let your competition know what you're doing; if it gets out that, say, Goldman Sachs is buying a whole lot of Google stock, you can bet that the price of Google will rise and it'll cost Goldman a whole lot more.
When I was still tangentially involved in financial software, there was a lot of interest in algorithms that could heuristically identify possible actors based on patterns in the data, much like how Google identifies webspam or PayPal identifies fraud. I'm not sure how far this got, though, and obviously if some company succeeded in it, they wouldn't tell anyone. Actually, I kinda wonder if this is the sort of stuff Palantir is doing.
This article is entirely devoid of content. It is completely worthless.
Newsflash for everyone thinking about being involved with the markets: the reason they work is because there are participants with different motiviations and ideas on how to make money. Period. By definition, the "plankton" of the markets are the market makers (both designated and implied, read passive HFT). These guys provide immediacy. They do that with the express intent of continuously trying to manage their inventory of any particular stock to 0 (with constraints of their pricing model). This directly implies they have a very high turnover and a holding period that is minimized as much as possible.
Why do they do this? Market makers provide a valuable service: immediacy. They supply to other traders an OPTION to trade with them by displaying liquidity on the standing limit order book. Therefore, they must deal with adverse selection (trading with counterparties who are more informed than they are). A market maker is there, ready to trade, and when someone lifts their offer or hits their bid they want to turn around and lay that position off as quickly as possible, ideally via another limit order being matched with a market order. This is the way they earn their living: by making the spread.
Keep in mind that this could easily be a statistical quirk. Firms that make very frequent transactions will tend to make a lot of them; as a result, they deal in insane volume and will make up the majority of the sample size. The statement in the headline is simply saying "Stocks that get traded often make up the bulk of stocks that are traded," which most people would say "Duh" to.
To see how this plays out, imagine a hypothetical financial world that looks like this:
Firm A has $100M under management and makes a transaction every 10 seconds (total: 3 million trades). They make a return of 10%, $10M. Each trade is for 10,000 shares (average 0.03 cents/trade profit).
Firm B has $1B under management and makes a transaction every 3 months (total: 4 trades). They make a return of 10% ($100M). Each trade is for 10 million shares ($2.50/share profit).
The remaining 100 firms have a total of $100M under management and make one transaction per firm per year. They make a return of 10% ($100,000 each). Each trade is for 1000 shares.
(Ignore how everyone makes a profit in this supposedly closed financial system...we can just chalk it up to the Fed injecting money into the economy.)
If you average the holding time of each stock by transaction, you have (3 million trades at 10 seconds + 4 trades at 7.5 million seconds + 1,000 trades at 30 million seconds) / 3,010,004 trades = 1019 seconds. That's an average holding time of just under 20 minutes.
If you average the holding time of each stock by volume, you have (30B shares at 10 seconds + 40M shares at 7.5M seconds + 100,000 shares at 30M seconds) / 30,040,100,000 shares = 9,976 seconds, or an average holding time of about 3 hours.
If you average the holding time by firm, you have 1 firm at 10 seconds, 1 firm at 7.5M seconds, and 100 firms at 30M seconds, for an average holding time of just under 1 year.
If you average the holding time by firm, weighted by capitalization, you have ($100M * 10 seconds + $1B * 7.5M seconds + $100M * 30M seconds) / $1.2B = 8.75M = about 4 months.
Note how different the results are depending upon how you perform the average. The article sounds like it's averaging by transaction (i.e. taking the total number of trades and dividing it by the time period they're traded in), which is method 1. I'd argue that a better metric is method 4, averaging by firm weighted by capitalization, which indicates how roughly how long firms with lots of money at their disposal are choosing to hold stocks. In a world like the hypothetical one above, where you have a few high-frequency trading firms, a few giant fundamental-investing firms, and a bunch of retail investors, the results for that are wildly different.
Charge a $5 tax per trade on stocks held less than 24hours. That would slow the volatility of the stock market quite a bit. We should probably have a speculation tax on commodities too, to quieten the wild swings in prices we sometimes see.
15 comments
[ 207 ms ] story [ 1133 ms ] threadA: Don't try. Holding stocks a long amount of time insulates you from the market-timing nonsense where the day traders are fighting tooth and nail for fractions of a percentage point of profit.
In fact, don't bother clicking here is the whole text of the 'article':
"What, you bought a stock one whole hour ago? And you still own it? That stock is practically a dinosaur in Wall Street's new reality.
The average time a stock is held is 22 seconds. But that's an improvement from a year ago, when it was 20 seconds, according to analyst Michael Hudson, an economics professor at the University of Missouri.
It's all because of computerized split-second trading. "The financial sector is short term," Hudson said in an interview. "They talk as if they're long term."
Wired has an excellent overview of how computerized trading has taken over Wall Street. It's so bad now, in fact, that computers now read news articles at lightning speed, searching for key words that will help them buy stocks. "The machines aren't there just to crunch numbers anymore; they're now making the decisions," Wired reports. Computerized high-frequency trading makes up about 70% of all trades, experts say.
How can the individual investor compete with that?
I don't understand you copying the full text of an MSN news article because you don't like the advertising. Please respect copyright a little bit. If you don't respect copyright, at least respect Paul and don't create reasons for lawyers to send him DMCA infringement notices.
That's inconsistent.
The wired article is here: http://www.wired.com/magazine/2010/12/ff_ai_flashtrading/
I really wonder which one of the two remaining lines you think the DMCA infringement notices will be about.
Yes, they have tremendous fees, but if the gains are there...
Of course that shifts the questions to picking a good fund, but that's at least something you can do.
"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."
Quite a contrast.
I wonder if buy and hold is as good of a strategy now as it was back when he started. He had the luck to start at a time from which there was a decades-long growth in the stock market.
Size is Buffett's anchor now. If you give him a small amount of money, say $50Million, I think he'd do wonders with it.
I model my investing style after what he was doing about 10 years into his career and its worked out well for me with very little stress. The only reason I sell is if I find something that looks like a better value, but even if I'm right to move elsewhere the taxes make me question my decision every time.
"In recent years, what is known as high-frequency trading — rapid automated buying and selling — has taken off and now accounts for 50 to 75 percent of daily trading volume."
From what I've read, its gotten pretty ridiculous overall.
http://www.nyxdata.com/Data-Products/Daily-TAQ
However, doing things like producing a histogram or tracking the individual numbers for a given fund require that you be able to identify individual traders, which is generally not possible. Funds will route their orders through brokers specifically to anonymize them, often slicing a given order up into many sub-orders so that it can be spread across multiple brokers. The golden rule of the financial industry is to never ever let your competition know what you're doing; if it gets out that, say, Goldman Sachs is buying a whole lot of Google stock, you can bet that the price of Google will rise and it'll cost Goldman a whole lot more.
When I was still tangentially involved in financial software, there was a lot of interest in algorithms that could heuristically identify possible actors based on patterns in the data, much like how Google identifies webspam or PayPal identifies fraud. I'm not sure how far this got, though, and obviously if some company succeeded in it, they wouldn't tell anyone. Actually, I kinda wonder if this is the sort of stuff Palantir is doing.
Newsflash for everyone thinking about being involved with the markets: the reason they work is because there are participants with different motiviations and ideas on how to make money. Period. By definition, the "plankton" of the markets are the market makers (both designated and implied, read passive HFT). These guys provide immediacy. They do that with the express intent of continuously trying to manage their inventory of any particular stock to 0 (with constraints of their pricing model). This directly implies they have a very high turnover and a holding period that is minimized as much as possible.
Why do they do this? Market makers provide a valuable service: immediacy. They supply to other traders an OPTION to trade with them by displaying liquidity on the standing limit order book. Therefore, they must deal with adverse selection (trading with counterparties who are more informed than they are). A market maker is there, ready to trade, and when someone lifts their offer or hits their bid they want to turn around and lay that position off as quickly as possible, ideally via another limit order being matched with a market order. This is the way they earn their living: by making the spread.
To see how this plays out, imagine a hypothetical financial world that looks like this:
Firm A has $100M under management and makes a transaction every 10 seconds (total: 3 million trades). They make a return of 10%, $10M. Each trade is for 10,000 shares (average 0.03 cents/trade profit).
Firm B has $1B under management and makes a transaction every 3 months (total: 4 trades). They make a return of 10% ($100M). Each trade is for 10 million shares ($2.50/share profit).
The remaining 100 firms have a total of $100M under management and make one transaction per firm per year. They make a return of 10% ($100,000 each). Each trade is for 1000 shares.
(Ignore how everyone makes a profit in this supposedly closed financial system...we can just chalk it up to the Fed injecting money into the economy.)
If you average the holding time of each stock by transaction, you have (3 million trades at 10 seconds + 4 trades at 7.5 million seconds + 1,000 trades at 30 million seconds) / 3,010,004 trades = 1019 seconds. That's an average holding time of just under 20 minutes.
If you average the holding time of each stock by volume, you have (30B shares at 10 seconds + 40M shares at 7.5M seconds + 100,000 shares at 30M seconds) / 30,040,100,000 shares = 9,976 seconds, or an average holding time of about 3 hours.
If you average the holding time by firm, you have 1 firm at 10 seconds, 1 firm at 7.5M seconds, and 100 firms at 30M seconds, for an average holding time of just under 1 year.
If you average the holding time by firm, weighted by capitalization, you have ($100M * 10 seconds + $1B * 7.5M seconds + $100M * 30M seconds) / $1.2B = 8.75M = about 4 months.
Note how different the results are depending upon how you perform the average. The article sounds like it's averaging by transaction (i.e. taking the total number of trades and dividing it by the time period they're traded in), which is method 1. I'd argue that a better metric is method 4, averaging by firm weighted by capitalization, which indicates how roughly how long firms with lots of money at their disposal are choosing to hold stocks. In a world like the hypothetical one above, where you have a few high-frequency trading firms, a few giant fundamental-investing firms, and a bunch of retail investors, the results for that are wildly different.