Yes, toxic flows and adverse selection are the magical buzzwords that get thrown around a lot. I’m familiar with glosten-milgrom model and private information and all related paradoxes.
What you’re failing to disclose is that there is an easy way out of solving the adverse selection problem. For example you could buy “uninformed flow”. I think that you could agree that for the touted sophistication of the field you would expect something … more sophisticated?
Again, don’t get me wrong. I love the field but I think it’s stagnant in certain aspects and I like to have a sober view of it.
EDIT: As a thought experiment, envision a setup where the trading strategies compete on the basis of the strategy itself, with a single global market with a single API that takes bids and offers in rounds and anyone who wants to is allowed to participate for free with no fees whatsoever. For the sake of example, suppose it’s a government owned and operated project just like the GPS (for which you don’t have to pay a subscription) in your phone. No market access fees, no market data fees, no preferential latency treatment. A perfect coding competition playground.
How many current market participants do you think would survive in such an environment and if your answer is different than the current number, why?
While I fully believe you are an experienced practitioner however I feel your thought experiment actually shows you don’t understand the underlying nature of capital markets in capitalism, the relationship between risk and liquidity, and the fractal nature of timescales of participants. I’m fortunate enough to have both a background in HFT but prior to that a background in many other aspects of capital markets and the broader financial system, which gives be a better perspective than the typical HFT strategist or engineer.
It’s too late in the day for me today to attempt to write a coherent and accurate explanation of exactly why I say that. However I will say you don’t understand this isn’t a zero sum game and it’s an incorrect argument to claim HFT is an arms race in a game like a war, which is a negative sum game.
You start sounding a bit like chatgpt with the “it is I who have the sole power of understanding” and self contradicting arguments. I never mentioned zero sum games or anything of the sort. Please don’t ascribe your thoughts to mine. I did helpfully screenshot your comment invoking war and claiming HFT is like it. I can jog your memory if you’d like. Now you’re claiming the opposite. Your arguments start becoming internally inconsistent.
Your risk argument doesn’t hold water because liquidity is not the only risk. There are at least 20+ I can think of from the top of my head without even trying.
HFT is war but the system as a whole isn’t. My impression of our interactions on HN is you have a valuable insight that perhaps I can even agree with. However unfortunately I don’t know what it is yet as you haven’t explained properly what your hypothesis of negative effects or externalities HFT operators have.
HN isn’t the best forum for this type of ongoing discussion. Engage me on reddit if you like. u/alchemist1e9
What you’re failing to disclose is that there is an easy way out of solving the adverse selection problem. For example you could buy “uninformed flow”. I think that you could agree that for the touted sophistication of the field you would expect something … more sophisticated?
Again, don’t get me wrong. I love the field but I think it’s stagnant in certain aspects and I like to have a sober view of it.
EDIT: As a thought experiment, envision a setup where the trading strategies compete on the basis of the strategy itself, with a single global market with a single API that takes bids and offers in rounds and anyone who wants to is allowed to participate for free with no fees whatsoever. For the sake of example, suppose it’s a government owned and operated project just like the GPS (for which you don’t have to pay a subscription) in your phone. No market access fees, no market data fees, no preferential latency treatment. A perfect coding competition playground.
How many current market participants do you think would survive in such an environment and if your answer is different than the current number, why?