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Comment by dfc | Hacker News Reader

Are you saying that HFTs have no impact on Alice and Bob regardless of how prudent they are about investing? In addition to ETFs Alice and Bob also have market exposure through a company 401k. Are the 401k managers and ETF managers immune to the effects of the HFTs?

On the page[1] first documenting this algo NANEX says the following:

"We believe that this algo will continue to grow and if left unchecked, could very well contribute to the next flash crash because it removes precious network capacity and provides zero economic value such as price discovery."

Do you disagree?

[1] http://www.nanex.net/aqck2/3610.html

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It has no effect on Alice and Bob if they don't sell. It is favourable to them if they buy.

The stock price is just the opinion of 0.2% of people at any one time - and hence means essentially nothing to an investor. Does the spot price opinion/first impression of a person matter - or does the long term attributes of their character matter? Just because there are more opinions - being given at a faster rate - doesn't mean that a) they're right or b) they should be acted upon as fact and c) that they shouldn't be exploited for those of a more stable nature.

For example: I bought a huge amount of TSLA stock when it fell 12% in one day a week or so ago for no particular reason. I subsequently realised a 6% gain. I'm happy - thank you HFTs and short term traders - your vol makes my alpha.

What you are describing is a method of turning a profit on automated wealth destruction, or am I misunderstanding something?

There's as much wealth created when the price rises again as there is destroyed when the price first erroneously falls, all other things equal. What's really being described is turning a profit on prices that are, for whatever reason, set too low and return to previous levels soon after.

Of course, the poor sods who had their stops blown don't get their money back -- the recreated wealth winds up in someone else's pocket.

But then, blowing out people's stops so you can buy up the stock cheaper is a time-honored trick.

Stop losses are stupid - period.

If you're investing for long term - you shouldn't be investing in things that require stop losses.

If you're investing on margin - take a good hard look at yourself before you blow up.

If you're trading options - unless you're pushing liquidity - watch yourself before you blow up.

Sell side liquidity is there - until it ain't. Stop losses don't protect you.

Indeed. No one should be pitied for losing money in the stock market. If you know what you're doing, you'll know that there's risk involved; if you don't know what you're doing, you shouldn't be picking stocks in the first place.

People who lose out by being on the selling-too-low side of arbitrage have nothing to complain about. If you had a stop-loss order, you cede your position to the possibility of being sold too low. Moral being that like you said, if you're investing in something that might warrant a stop-loss order, you should be sophisticated enough to use something better instead.

>> If you're investing for long term - you shouldn't be investing in things that require stop losses.

Except that in the long term good companies sometimes go bad quite suddenly. Frequently, the harbinger (e.g. CFO suddenly quits) will erase a lot of wealth quite rapidly. Stops are a good way to not have your portfolio blow up while not also having to obsessively follow the news.

As an individual investor, you're not going to beat the automated algorithms on breaking news anyway. Trading individual stocks is a fool's game. Buy and hold index funds.

Just to be clear, I wouldn't counsel racing algorithms (this should be obvious). But you want to be able to exit somewhat rapidly in case of catastrophe at a portfolio company. A stop can turn a big loss into a smaller loss.

>> Buy and hold index funds.

To each his own, but this strategy has been pretty easy to beat over the last 20 years (even easier over the last 10), for those willing to study companies at all.

No, he's arguing that events like flash crashes don't destroy wealth at all. If the market returns to its original equilibrium after a week or so, then its as if the crash never happened at all.

Just keep in mind, in the stock market, you haven't made or lost money until you close out your position.

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