People love to rail on HFT, but at this point, its really not that profitable. It's just a reality of trading in the markets. There was a blip of time between 2008 and 2014 when HFT was extremely profitable. Those inefficiencies have been gone from the market for years. People were whooped into anger about how much money was being made, at this point its a complete non issue and needs to be removed from the highlight reels aimed at generating anger in the public. Lets move on from discussing the boogey man that is HFT, its really nothing.
Adding to this, HFT is a product of rule 612 of Reg NMS (the sub-penny rule). Markets are not allowed to show quotes in increments of less than $0.01 for most names. Since traders cannot compete on price, they have been forced to compete exclusively on speed.
The impact of such regulation was tested by the SEC recently with the 'tick size' program. Instead of reducing the minimum increment, some names saw it increased to $0.05. The hope was to increase liquidity while decreasing volatility in these names. In fact, those names experienced decreased liquidity with no decrease in volatility.
On the other hand, the Intercontinental Exchange reduced the tick size for sterling interest rate futures towards the end of 2018, and the result was ... decreased liquidity! And resulting increased volatility.
I'm not sure anyone knows for sure why this happened, but the best theory i've heard is that the reduction in tick size reduced the expected profits of market makers, because they are collecting less spread on every contract they turn around, while not affecting their potential losses, because external factors which cause the market to jump three basis points will still cause it to jump three basis points. Halved regular profits divided by constant occasional losses equals no longer worth bothering with.
you have some firms that know how to quote a product and can make enough money doing it to be worthwhile. They've done a lot of research and implemented systems to do that.
Change the rules on them for arbitrary reasons, the firms that were there leave. At least long enough to build new systems and trading strategies. Who replaces them, anyone? Why?
Increase the tick size, liquidity drops. Decrease the tick size, liquidity drops. The moral there is know why you are changing the rules in the market, how you are doing it and the implementation details and side effects that will result in getting the result you want or just don't do it. This could be better is garbage, know it is. Change is not good for its own sake if you want people to quote.
Usually it boils down to consolidation of liquidity. For the same reason there are well over 20 ATS venues but only a few are successful, ultimately new venues have difficulty naturally drawing resting order flow.
Market fragmentation aside, adding more price levels to set orders to disaggregates liquidity in the book, usually resulting in lower execution quantity (which increases your overall transaction costs if you’re trying to space trades out).
Orders are filled in the order that they arrive to the exchange (if there's more than one order at the same price). A global mis-pricing would still be subject to a race to exploit it - whoever submits first gets the fill, even if it happens in the future (in the next tick).
What you're proposing is turning continuous trading into a fast series of auctions, like what happens for every ticker on every exchange at the opening. This would have the disadvantage of no clear bid/ask - how can you be sure that the parties do not withdraw their offers before the next tick? And surely you must allow for offer withdrawals.
Why? It’s just like a clocked bus; you leave enough time for the levels to propagate along the transmission line and settle before closing the register gates.
All orders are placed at the previously known tick price and later orders will occur at the price declared on the next tick.
Of course no trader should access the “ghost price” before it is announced on the tick.
Propagation delays remain limited to local data centers and in any case it’s about globally known prices.
Yes, the ability to cancel an order now vs 1 second from now is not that meaningful. Or as the general public is concerned ‘If you’re directly placing orders on the stock market you can ware your big boy paints.’
No, a large fraction of modern tech and companies would not exist without the 'activities in the financial sector'.
Essentially any endeavor requiring capital beyond your means would have to be bootstrapped or required borrowing money at exorbitant rates. There is a reason the financial sector exists. It makes money by selling convenience and taking over quantified risk.
My point is not that the financial sector is unnecessary, it's that the majority of the activities are not of benefit to society, which admittedly is something hard to define.
Following on from that line of thought, it could be argued that a lot of companies don't provide any benefit to society, so the financial sector is just enabling these firms and thus of no benefit to society.
The sector exists because people willingly give it money in exchange for services. If you can’t imagine why that’s happening, maybe read up on why people pay for financial services rather than assuming something as stupid as most of financial services not providing benefit to society.
No one's confused why it's happening. It's legal to make money through financial services, and it reliably makes money. The investments into fintech that divert more cash one way or another until others catch up also provide very little and ever diminishing value, mostly just sideways and upward redistribution of wealth. The actual value generating sectors of the economy are always getting more anemic, and they're due for collapse because of how much everything depends on oil, cheap 3rd world labor, and creating external costs we've avoided facing.
>No one's confused why it's happening. It's legal to make money through financial services, and it reliably makes money.
No, you’re misunderstanding me. People are willingly using the services offered by the financial services sector. It’s the reason companies can quickly raise billions through IPOs, the reason you can get a million dollars for a mortgage and pay it back over 30 years, etc. Market participants that enable better price discovery and subsequently narrow bid/ask spreads provide immense value to society.
An average of just a quarter percent lower interest on mortgages is billions of dollars kept in people’s pockets. More efficient markets enable that and it’s these traders you loath that are making it more efficient. If it were just up to the banks they would love nice slow markets with huge spreads so they can line their pockets with your money.
>The actual value generating sectors of the economy
Sigh, that statement makes no sense already because finance generates massive value. It’s the reason people can retire. It’s the reason normal people can buy houses. It’s the reason normal people can start capital intensive businesses.
Efficient allocation of capital is one of the largest force multipliers of any modern economy. You lament that other sectors are anemic, but many could not even exist if it weren’t for financial instruments that allow them to control costs, raise capital, etc.
> Sigh, that statement makes no sense already because finance generates massive value.
I think it's not clear what I meant by value generation, and that's on me as I'm sure there's an established meaning that differs from mine. In my eyes, moving money from one person to another is not value generation. Only work that improves the net quality of life is generating value.
As an example, someone who spends all day digging holes and filling them in for money has destroyed value, because their work helps no one and the money transfer is almost neutral overall. Being a facilitator of mutually beneficial trade has value, but work that only extracts wealth destroys value by using labor to no net benefit --they could have been enjoying their time instead.
It's not something you can easily measure, but through this lens you can see how much of what we allocate human effort to is a waste.
>In my eyes, moving money from one person to another is not value generation. Only work that improves the net quality of life is generating value.
Right, and that’s naive at best. There isn’t an unlimited supply of money. Choosing where to place money can result in massive value creation or destruction.
Labor (or physical work by anything) and value have no implicit or explicit relationship. That line of thinking has been discredited so many times (even in your own ditch digging example) that it’s not really worth getting into here.
The reason this provides little value to society now is because there’s no easy way to leverage price information to make inferences about the world-state. HFT on a prediction market would provide lots of value to society.
As always, some profit is to be made from some trading practice - the market removes it within a few years of "mass discovery". All working as intended.
people aren't mad only because tons of money is made on hft. It's also because money is _wasterd_ on hft. That's $100 million dollars spent on something that has 0 use to society. It's just rich people playing weird games.
Think about the social benefits of $100 million invested in nyc transit infrastructure.
The economy's incentive structure is broken and this is a prime example.
Those 100m are not destroyed by burning them in an HFT furnace but rather used to pay developers, hardware, factory workers etc. Sure, it's not going directly into infrastructure but it is not lost.
In fact, it's quite possible that if it wasn't invested into HFT it would be held as cash by the company or paid out as a dividend (which is fine as well).
Your definition of 'waste' is awfully narrow. I'm not sure anything but destruction of the cash is waste in that view - except that its not even then a total waste because you are helping the money burning industry and furnace industry to thrive.
That is false. The 100m could have been spent on something which increases the productivity of people. It would still go to devs, factories, etc but at the end there is something from which society benefits.
So paying hardware manufacturers and programmers for their work doesn't benefit society? It is not like firing these people would see more cancer research or other stuff you might regard as more beneficial for society.
It does, but it doesn't create anything which can be leveraged to improve things further. Might as well just give the people the money directly, with no expectations of deliverables.
Firstly, this article has nothing to do with HFT. Goldman is executing on behalf of clients who are not HFT
Secondly, your statement makes an implicit assumption that there is no value in providing liquidity to capital markets. This assumption is false. Think of your local grocery store. Sure, you could drive down to the distribution center and buy stuff there. But instead you go to the store where it’s conveniently laid out for you. Same with HFT. If it didn’t exist, you would still be able to buy and sell but markets would be a lot less liquid and buying and selling less convenient.
An article titled "GS spending millions to shave millisecconds off stock trades" has nothing to do with HFT?
It isn't at all clear to me buying and selling at an auction even only once a day, let alone once a minute or second would make financial market end user worse off.
Grocery logistics is a terrible analogy for financial markets.
The "F" in in "HFT" stands for "Frequency". This is a separate concept from latency. GS are spending money so they can execute their clients' orders on the market faster, to reduce the risk of the price shifting between order and execution.
> It isn't at all clear to me buying and selling at an auction even only once a day, let alone once a minute or second would make financial market end user worse off.
Go look at the history. Back before the 80s, trading was done by hand, sub-second anything was impossible. Guess what! Spreads were enormous, and the cost of doing business was huge. As a financial market end user (I have a pension), I want the smallest spreads possible.
GS is spending the money on this project to reduce high frequency traders ability to capture some of the value of their trades on behalf of clients. Why do you think the price moves away from them? It isn't random. It has everything to do with hft, which has everything to do with market structure.
I'm highly familiar with the history, no one is advocating for a return to open outcry.
Your pension is almost certainly a GS client and footing the bill for this project through execution costs. A periodic auction model would make latency much less of a problem and society's time and energy could be put into solving real problems.
This makes the assumption that time in and of itself has no relevance. Sure the money is reused, but ultimately what is valuable is labour output, and usually that has time relevance. Further, if we consider the activity as steady state, that now means a % of the labour force is semi-permanently unable to be used for something else.
Actually he probably meant that 100 million are being used to redirect efforts and resources destructively. Your argument can be used just as well to defend an "investment" of 100m into efforts to dig up aluminium, turn it into dust and throw it into oceans.
Faster networks would come for other more useful endeavors too, like high quality video conferencing/telepresence stuff. People say how important it is to be working in the same place because conferencing is "just not the same", not realizing it's mostly a technical problem, shitty ISPs, slow routes with high jitter or loss, and insufficient mics, speakers, and software.
But nobody is willing to put up the money to fund the research required to improve those speeds like HFT customers. A million dollars per switch is not a problem for them.
I don't know, I didn't use past tense. I imagine that investment into technology is going to bring more benefit than pointless consumption. Also - what about effective markets, that's not a benefit?
right, you used present tense. You meant hft "could possible have" more benefit? HFT is much more the product of the current regulatory structure than a feature of efficient markets.
Instead of reading Flash Boys, which is good but not really very academic, I'd recommend "The problem of HFT" by Haim Bodek. It explains how he set out to build a sohpisticated trading shop with modern technology and realized all of his competitiors were just gaming the market structure and being handed advantages by exchanges desparate for trading volume.
HFT, being technology, has more benefit than pointless consumption, by definition - at the very least someone is creating something new and that is good for the economy. What are the actual benefits of this project in the market is unknown, especially because it does not exist yet.
Maybe mad is a strong word, but, it isn't just $100m, That's one investment by one company. It's billions of dollars across the world to gain arbitrary milliseconds.
Restructuring financial markets, to use periodic auctions for example or by adding speed bumps rather than continuous trading would probably do away with an entire wasteful industry and benefit the actually relevant parties in the financial system, people who have money, and people who need money, at the cost of the unnecessary middlemen.
not to mention risky. remember Knight Capital, the kings of HFT?
on August 1 no less, their new software deployment essentially annihilated half a billion dollars, all due to - you guessed it - a refactored command line flag! can't make this stuff up.
As an outsider with admittedly limited knowledge. What would happen if you limited movement on a stock to be on the second?
Would that not prevent this never ending race for faster and closer access. Something that doesn’t really seem to be adding value to society or the market.
who gets the priority in order fulfillment placed in that second? otherwise you have the same issue. the brokerage might also be tempted to make money by front running those trades since that have all the trades in front of them for a second before needing to be fulfilled
Yea, I was one of them. I mixed up trading ahead from side-channel knowledge which breaks insider-trading rules, with having a fast engine which can just move bits faster than the other guy.
I don't "like" HFT the same way I don't "like" the market at all, but HFT is not actually stealing grannies money.
Side channel knowledge doesn’t break insider trading rules. You need to have a fiduciary duty to someone to betray to be doing insider trading. There needs to be someone who has the right to that knowledge, who you’re supposed to act on behalf of, who doesn’t want you trading on it.
There are many types of “side channel” non public information that aren’t insider trading.
Depends. This is the case in the US, but in the EU, “insider trading” is more absolute, just “trading on non-public information” (regardless of how it was obtained) and can happen even without fiduciary duty.
