Mod note: Best of Eddie, this was originally posted on 9/25/12.
It's hard not to like Mark Cuban. The guy is the quintessential American success story. He was a "C" student who partied his ass off, but when he buckled down and got serious he created an empire. But he doesn't have a very high opinion of Wall Street these days. And you know what? I can't say I disagree with him.
I first got into finance because I was romanced by the notion of a capital market where smart companies could come to raise money to produce the innovations that would change the very world we lived in. Growing up in Silicon Valley in the '70s and '80s, I got to watch a lot of it firsthand. But that's not what Wall Street is about anymore.
The important issue is recognizing that Wall Street is no longer serving the purpose that it was designed to. Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings. What percentage of the market is driven by investors these days?
He goes on to point out that high frequency trading, which absolutely dominates market volume today, is no different from a computer hacker stealing credit cards (aside from one activity being legal and the other not). He then lowers the boom with his solution:
My two cents is that it is important for this country to push Wall Street back to the business of creating capital for business. Whether it's through a use of taxes on trades (hit every trade on a stock held less than one hour with a 10 cent tax and all these problems go away), or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for one year or more, and no tax on dividends paid to shareholders who have held stock in the company for more than five years. 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.
Imagine that for a minute. A ten-cent tax on every position held for less than an hour. More importantly, zero capital gains tax on any position held for more than a year. And no tax on the dividends earned from positions held more than five years. It would change the market overnight.
Economics is all about the effect which incentives have on market participants. Right now there is absolutely no incentive to invest for the long term. Even if you end up being right, the gains you would have normally earned have been short-changed by bots slamming the stock around on a daily basis.
I don't buy the liquidity argument, either. The market got along just fine before HFT.
So I'm curious about what you guys think. Is Cuban off his rocker? Or would the taxes he proposed change the incentives in the market to foster growth and pull us out of the doldrums?
I'm of the ilk that HFT just isn't worth the risk it poses to the financial system, although I do acknowledge the arguments on the other side. I think it's ridiculous that companies can pay money to position themselves closer to the exchanges and then earn an otherwise inaccessible profit due to nanosecond advantages.
And a quick tangent...Cuban's overall point I couldn't agree with more. Most of my experience is with micro cap companies looking to raise capital, and more often than not their cost of capital (including banking fees) is simply insurmountable, regardless of how good the business idea is. The primary reason for this is because of all the additional costs layered into the banking function. The banks servicing small and/or early stage companies still need to earn a profit, and if deal sizes are small then transaction volume and high fees are the only ways to do it. This creates a ton of issues/conflicts of interest. Maybe cutting out the middleman altogether (crowdfunding?) will change the way things are done.
I'm a huge fan of Mark Cuban. He's a smart man and he has a point. That said, did anyone see what he wrote on Twitter last night about the Packers/Seahawks game.
Jeez. The man's great in business but he's more fun to watch as an owner. I seriously would have loved to see him blow up last night if he owned the Packers. That would have made that shitty game so much better.
As a bears fan, I saw nothing wrong with the outcome of last nights game :D
You add $0.10 for holding something under an hour and y ou will eliminate liquidity because you eliminate a lot of market makers. They make money off bid ask, you add tax to that and they're a lot less profitable. Liquidity in markets would shrink..... and stocks would be lot more prone to big moves due to liquidity gaps. Essentially you create potential for flash crash in individual stocks and in process of doing so you destroy all arbitrage in markets. Hence reducing liquidity. Arbitrage is something that has existed from the very beginining also.\
For every winner in derivatives market there is a loser. So how is there not incentive in the market
" Right now there is absolutely no incentive to invest for the long term. Even if you end up being right, the gains you would have normally earned have been short-changed by bots slamming the stock around on a daily basis."
You can clearly swing trade the market, but you are referring to different timeframes. If I trade once a day or once a month or once a year or once every ten minutes. obviously my profit potential is best every ten minutes because I have potential to catch every squiggle. Key word is potential. According to Mandelbrat and Gaussian curve your accuracy improves when you ignore the noise that happens every ten minutes. Aka that chaos that exists in markets and is away from true move
How about a $0.10 tax for holding something for less than 500 miliseconds? Current systems can do it all in, what, 5-10 miliseconds? 500 doesn't seems like it would hurt liquidity, but it would slow it all down by a factor of 50-100. In terms of Moore's Law, that would bring the market back to (back-of-the-envelope calc) the year 2000 in terms of trading speed, I think. Seems reasonable, but, who knows, just a thought.
Maybe. I just don't know the answer or if there is a correct one. Perhaps it would help our deficit issue, but if people want to speculate by the second rather than by another timeframe they should be able to.It should be within their right.
Eliminating HFT eliminates arbitrage in markets...and causes flash crashes? I'm not sure we're talking about the same thing. Are you talking about the same computer generated trading that cost Knight Capital $440MM in a matter of minutes, or routinely pulverizes the silver and crude futures trading markets? Or is the basis for a class action lawsuit against the NASDAQ? I think I missed that part in Intelligent Investor.
Opportunities for arbitrage and alpha capture have been effectively precluded by HFT--not the other way around. I hear your argument that Mandelbrat and Gaussian's theory says to ignore the 'noise;' I just don't subscribe to the notion that there has to be any noise in the first place, and that machines executing trades in fractions of milliseconds is the most effective method of providing liquidity.
I love what Cuban is saying because he's referring to the end-goal of WS in this era. He's saying it's less about providing liquidity and capital to businesses seeking to innovate and expand, as he thinks it should be, and more about these esoteric financial firms squeezing out profits from temporary market fluctuations caused by mindless robots. His understanding of the market is Buffet-esque; the idea of stocks and bonds is to own a company itself (or its debt) and provide them with capital. Is that notion outdated? Maybe so in today's day and age. But the man is correct, nonetheless. $.02
Just like facebook, google, or apple.. ....every business must evolve and change its model to survive and thrive. Survival of the fittest. Margins dropped from the typical M&A and junk bond market began..... you get the picture from there to IPO and tech bubble to MBS, CDO etc. to now HFT. It is just an evolution. A lot of HFT algorithms provide liquidity to seek bid ask, while others take more directional trades. To do arbitrage today, it is simple only captured by HFT in any liquid market (OTC is different story). Market today has evolved into its own gambling exchange with use of derivatives and options. More leverage to make more leveraged bets without purpose of helping companies but to profit from their moves. Is it wrong? Not in my opinion, but evolution of the business
Cuban/Ventura 2012
I mean... lets face it The Body really WOULD be the best Vice President for him... And Mark Cuban addressing congress in a Mavs Tshirt would be more entertaining than The Price is Right... Charlie Sheen for Secretary of Defense? #winning
Why is it anyone's business how another person or firm chooses to use their money? Fact of the matter is, they are buying and selling - doesn't matter at what frequency. Isn't that right protected by the 5th amendment? just sayin.
Amen.
I don't think Cuban is charging the sanctity of the Bill of Rights. If you don't think HFT puts retail investors at an inherent disadvantage (ie invdividuals, not FIs, to whom the BOR applies), I would love to hear your thoughts. I certainly see your point, but the SEC wouldn't exist if we relied on the constitution to somehow govern our financial institutions
High frequency traders begin the day owning nothing and they end the day owning nothing in terms of common stocks. But during the day they're accounting for between 50 percent and 65 percent of the volume. The liquidity that is added to the market is useless, with no lasting value. It consists of orders that are placed and that are quickly retracted. It heavily, heavily consists of front-running. There's no economic justification for a large cap stock swinging up and down 5% in the same day. If you are a proponent of value investment, as most of us profess to be, I personally don't see how you can endorse HFT. I'm also not necessarily demonizing HFT, as I certainly understand that businesses and markets evolve--I just think Cuban's point is that the stock market is no longer a viable avenue for many seeking to buy or sell capital due to all these new external forces.
"Kick the ladder out" or more simply "Fuck you, I got mine" is the environment that my generation works in.
This sounds a lot like when Bill Gates stated that taxing email would solve a lot of problems. Sure it would kill a lot of bad behavior like spamming, but it would also cut down on overall use of the medium and that's a serious problem. An hour? If you're in the forex market, that's an eternity. If you sell off to jump on an opportunity, you get taxed for doing so? We heard the same crap coming out of California after the first tech bubble implosion, how it was all Wall Street's fault. Facts are, everyone involved is at fault. This is simply some dude with no knowledge of the industry playing armchair general.
How about we make a rule that tech companies aren't allowed to go public until they have a positive balance sheet? Or, any tech company that hasn't been profitable for less than ten years can't have any access to the public market at all? That would be good for the long term investors but would kill the industry pretty quickly. Facts are, people become more conservative about risk in a downturn, but managing risk and attempting to eliminate it are two different things. I'm not sure Mark Cuban is doing either, it sounds like he's just jumping on the bandwagon: there was no problem with traders in an up market when his company needed capital....now that the industry is down due to a blowout in housing, it's basic mechanisms are the problem? I don't think so.
I hold a stock for a year, it goes up eight points, a bot clips 0.000000001 point when I sell it. Personally, I don't care, that doesn't add up to enough to matter to me the retail investor...If there's an issue with HFT from the institutional investors, I can't comment, I just don't know enough.I DO like the idea of tax incentives for long term investing. The gov't gives tax credit for home ownership and marriage/kids for the same reasons: long term stability instead of people just running down themselves and the system with a string of loony short term fads with no substance.
Cuban was referring specifically to stocks with the $.10 tax. Of course currency trading is a much more rapid fire game, but currency trading doesn't provide capital to growing businesses, an idea I think he's definitely more partisan toward being an entrepreneur himself. I would also argue that computer glitches and HFT can have disastrous consequences for institutional investors (see Morgan Stanley post FB, Knight Cap, etc) that no degree of risk management could prevent, so while everyone is responsible--including the armchair generals (hilarious term btw)--something can be said regarding the current state of security and confidence the capital markets
If people were really thinking long long term investing, most tech would be dead in the water. Facebook, apple, zynga....there's no way to tell if these companies will be profitable in a decade to the extent they are now, it's almost gambling. Look at RIM....that's the nature of the tech industry. Here today, gone tomorrow. If people want to invest, invest....if they want to trade, then trade and understand it's risky, and tech is one of the riskiest of all.
I disagree with Mark Cuban, and I think he's out of his depth on this. Many times, people who get successful in one area all of a sudden think that they know more about other topics than they do. This is my perception of Cuban: he's jumbled a bunch of 'financial sounding issues' in his head without linking them correctly, and then throws out his punch line...banks need to lend more to startups.
Why not just say that?
I was initially supportive of HFT - I thought it improved liquidity and efficiency. But it seems to be only the former. Theoretically, a higher volume of transactions would smooth price movements, but these algorithms are not trading off of the same metrics as everyone else. Instead, it seems to impair the efficient allocation of capital.
Not quite sure how to solve it. I would support preferable taxation of long term investments, but I think a transaction tax could be extremely dangerous to market liquidity.
Good point. What further adds to the conundrum is that he is a tech guy himself.
Man, little did I know that the solution to all of life's problems is to tax it. Maybe if we started taxing cancer it would magically be cured.
On a side note: I wish there was some HFT going on with my penny stock, damn thing's got a spread that's about 15%... on a good day.
More food for thought:
http://finance.fortune.cnn.com/2012/09/25/knight-dark-pool-loses/
The market isn't for people to make returns? Only to sell their IPO purchases? Yeah, for sure buddy.
The point of a market is to reflect what people think the price of an asset is at a given time? Okay, sure. Then why the fuck are you sitting here arguing for computer algorithms to be dominating trading volume? Does pumping and dumping reflect the price ANY people think of an underlying asset? That's exactly my point Turing--its artificial, inflated volume.
If you're a value investor, why do you give a fuck about intra day vol? Not sure who taught you finance, but value investment is based off fundamental analysis. HFT does not involve fundamental analysis, and thus distorts stock prices. Can't tell if you're a troll or actually this retarded.
lol, ok.
I said, the secondary market is meant for people to have the OPTION to sell. Which by extension means someone else buys in the hopes of making a return. But the whole point is to have the ability to sell whenever you want. HFT just does it faster and more frequently.
I'm not arguing for computer algorithms to be dominating trading volume, bro. People created those programs, they represent people's ideas of what the value is. Pretty sure pumping and dumping is based on fraudulent misrepresentation. Not sure of any HFT that involved this, but I guess I'll take your word for it?
That last part... I'm going by logic (maybe it's fucked up,) but value investing involves buying something you think is cheap in the hopes that the market will eventually recognize the value you think it actually has. How does HFT distort stock prices when it's all based on you OPINION?
jesus i'm arguing with a penny stock trader
The fundamental question being raised is whether or not HFT should be allowed (which Cuban believes should not), and what mechanism should be enforced to prevent HFT. The solution put forward was simply to re-align incentives through adding a layer of expenses to HFT that wouldn't be born by buy-and-hold retail investors.
If the only value-add of HFT is liquidity, then I agree with Eddie that HFT can be eliminated. I don't ever recall having problems with liquidity in the market for anything above a pink-sheet security.
ah, I see where you were going with the secondary market part. Apologies for insinuating you might be anything less than very bright, I misunderstood. It's just those fucking NFL refs man
you haven't spent much time on wso chat have you?
I thought they didn't have it anymore
If we restrict HFT we should also restrict average investors who trade on rumor, CNBC and Yahoo Finance posts.
HFT is related to volume and liquidity. Outside of systematic errors which cause large price swings, and are corrected or halted through fail safe measures, HFT doesn't really impact the long term, fundamental price.
http://www.nytimes.com/roomfordebate/2012/08/06/how-to-regulate-high-fr…-trading/long-term-focus-provides-most-protection
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2066884
Now there is also research with a negative view of HFT. Either way, it isn't going anywhere.
My only issue with HFT is that its utility to markets is minimal at best and the people behind it could be put to better use if they were finding cures for diseases or programming something more useful--they could be put to better use in just about anyplace else in finance for that matter. That's just my somewhat hypocritical opinion.. Anyway, I don't think a small tax on each position lasting fewer than, say, 10 minutes would be half bad.
A lot of people don't know this, but a couple months ago when they thought they'd isolated the Higgs Boson at CERN they also had data indicating that there were neutrinos moving at faster than the speed of light. If you need an example of how out of control HFT has become, the notion of neutrinos moving faster than the speed of light threw some quant shops into an absolute tizzy. Why? Because if something is faster than the speed of light then theoretically trades can be executed at that higher speed. So what? It meant traders could travel back in time (even just a few microseconds) and pile into trades that have already happened.
Now I ask you, is that the best use of those resources? Not judging here, but c'mon.
Also, it was later determined that the neutrinos were not moving faster than light, so it looks like that universal constant remains, well, constant.
that's some Twilight Zone shit right there
Also, all the stuff we think about on a daily basis like who will win this election, some protesting in Europe, or even a major war, will probably not be remembered much (if at all) in 300 years. The discovery of this particle will be the most important thing remembered about 2012 by far.
Unless the next elections in the US/Europe mean that government funding of basic scientific research is cut!
Scientist may be able to find the Higgs particle, but capitalists still cannot restructure too-big-not-to-be-bailed financial institutions, over-leveraged mortgage markets, or unstable currency systems (the Euro). These are the biggest barriers to new capital formation in my opinion. The sad thing is, we have the knowledge to do it. It's not nuclear physics!
Do you guys thing that HFT and other mindless speculation is a symptom of the perceived problem (the lack of capital formation) or the cause?
http://online.wsj.com/article/SB100008723963904435072045780198909847511… "Germany Taps Brakes on High Frequency Trading" - WSJ
Take a look. Could be significant as the UK and France are both considering, or already in the process of adopting similar measures.
I'm a Cuban fan definitely because he's entertaining to watch as an owner.
These ideas have merit, although there's no way the 10 cent tax mentioned above would ever pass Congress.
The fact that most people seem to ignore is that HFT doesn't actually provide liquidity. But it doesn't hurt the system and move prices as much as many people think either. Something like 80% or 90% of their trades have an HFT shop as the counterpart. And many of them are done through dark-pools or other alternative sources of liquidity, not exchanges. Which is why it's not real liquidity, it's just people playing their games. And I don't have a problem with it, they don't add anything to the markets, but they don't hurt them either. Algo trading is another thing, but those are actually useful. As for the rules, I think they need refinement so they don't hurt market makers. If there are no liquid secondary markets the primary markets freeze, so I think what Cuban suggests is quite counterproductive tbh.
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