Transaction volume is ultimately not the important metric--revenue is. And, following [1], it seems that the total revenue for HFT was probably around $2Billion in 2013--for a whole industry, that's not very much! Measuring transaction volume is akin to comparing shipping between Amazon and Walmart ignoring the fact that Amazon ships directly to consumers while Walmart mostly ships to large Walmart stores.
"...increasing liquidity is the last refuge of bullshitters" is not an argument--it's an assertion. That was not really supported. Liquidity is a good thing; the article claims that HFT does not help much because most of the actual benefits happened before its advance. Of course, considering how limited HFT revenue is compared to other forms of trading, it's likely that the benefits are just smaller in proportion.
So I don't see, from the article, that HFT is necessarily socially useless. Rather, I see that it is likely useful in a moderately small way spread out over a lot of people (most people in the markets). The benefit is not obvious or concrete, but that doesn't mean it doesn't exist.
Similarly, the article complains about how bots just quote each other prices without necessarily making a trade. I don't see how this is a bad thing. All it means is that their quotes are at a much higher resolution than manual quotes, that's all. This seems like it would generally be a good thing.
Now, I'm not saying that HFT is not without its own risk or issues--they're just not the issues brought up in the article. Or, in fact, in most popular articles: popular reporters want to turn HFT into a moral issue and paint HFT firms as evil manipulators, when they really aren't. The actual risks of HFT are more structural and technical, which, I suppose, is not great for a broad audience or lots of pageviews!
It's also not immediately clear that HFT should be banned or how to deal with it. Many proposals I've heard would reduce liquidity beyond affecting just HFT, raising real costs for consumers. Ultimately, this is why there has not been much regulation in the space!
See, here's the thing I don't understand about liquidity: If it's so valuable for trades to execute in microseconds instead of seconds, and the stock exchanges recognize this value and provide co-location etc to enable it, why are so many stock exchanges closed for half to two thirds of the day? [1]
Surely the 15+ hour shut downs are a much bigger limit to liquidity than a few microseconds here and there?
There's obviously no technical reason - I don't see Amazon or Google closing down their websites from 4pm to 9:30am. And if it's about the release of news, that only really needs a window of an hour or so.
I found a similar question on Quora [1], with an answer by an ex-quant. It seems to boil down to tradition and bureaucratic inefficiencies by the involved parties. So I agree, this makes the whole liquidity argument seem weak.
the stock exchanges recognize this value and provide co-location etc to enable it
Not true. The exchanges charge hefty fees to colo in their datacentre. What you do with it is completely up to you. It's just more revenue as far as the exchange is concerned.
why are so many stock exchanges closed for half to two thirds of the day
In practice, this doesn't matter. When NYC closes, trading moves to Tokyo, then onto London, then back to NYC. Anything you want to trade, you can do so 24 hrs a day if you really want to.
You say you can trade around the clock by trading around the globe. But a position in New York can't exactly be liquidated in Tokyo. You can hedge for an approximation, but then you have cost of carry. Most markets are also completely closed on Sunday. It's not obvious to your parent why this should be. And don't even mention the half-day for stocks in the US around Thanksgiving, which is just silly.
At this point, some companies depend on having that daily downtime. Their whole development is based around the fact that they will have guaranteed downtime. It's built right into their software stack.
Trying to fiddle with this expected downtime would throw (parts of) the industry into turmoil.
It's just a historical quirk, but it's probably here to stay.
All the people who work in finance I've spoken to have imputed to me that the industry is on the cutting edge, that they will and are able to go to any lengths to execute trades faster, and that they earn their bumper salaries by being the most talented technologists out there. They tell me stories of FPGAs and how they certainly couldn't use garbage collected languages and about people cutting holes in walls to shave valuable feet off cables.
Now, I'm sure that in the absence of any need to they haven't done the work to achieve 24-hour operation, but I didn't get the impression it would be beyond the abilities of the entire industry.
Do you think the people I've talked to misrepresented the industry, and it's not as advanced and competent as they made out?
That's definitely not representative. Perhaps you've spoken only to guys doing HFT. A lot of trading systems are written in Java, and something like 20ms between seeing a trigger and sending an order to the market is fast enough for most needs.
I think for 24/24 operation though, the problem isn't really a programming one but simply the sheer number of people who'd have to work in shifts. Traders, engineers, middle office, maybe even compliance or quants... all these people are really expensive. You can't just leave a system running without people to monitor risk, check for reporting breaks, approve transactions, etc. The end of day reconciliations and reports are also much easier done with the exchange down.
You don't understand. Not everything is written in C. There's a backend system for reporting OATS that starts at 5 PM. If you need to make a non-trivial change you better not deploy it during market hours. Most of these systems are written in Java by guys who aren't at the firm anymore and didn't care when they were. You say cutting edge (which I would strenuously debate). But it's not magic -- in fact it's actually quite mundane when you get down to the nuts and bolts.
Surely there are ways to get rid of it without the transition being so traumatic. For example, the change could be announced a few years prior, and the downtime could go down by an hour per year.
To put things into perspective, the company I worked for responded to bug reports by hiring a team of people whose role was to manually alter the database any time a customer reported a data problem. Dozens of times per day. In other words, instead of fixing the software, it somehow became a reasonable idea to dedicate employees to fixing the symptoms by hand. It made sense in hindsight: they were making so much money that they took the path of least resistance. Paying employees to fix the problem immediately was quicker than trying to hunt down a competent programmer to try to fix the problem without causing more problems.
The change would be traumatic no matter how long they are given to plan for it.
Oh, here's another reason I forgot to mention: You can capture huge profits by exploiting the opening and closing few seconds of the market. A huge portion of all daily trades happen within the first few and last few seconds of the day. So there's a financial incentive to leave things as they are.
From a standpoint of market efficiency, I believe the weekend is a similar "test". Although, i agree that their are diminishing returns to a-synchronous opening hours.
It's true! A certain company has a trading platform that, when run, will wait until the markets open, do some setup stuff around the open, trade for one day, then do nothing forever. Some script comes by to kill -9 everything later in the night so it can be born anew.
Can't agree more (focusing on microsec vs nights/weekends). It's not an excuse to say they need to train/test their algos, they have entirely separate machines for that. For any other tech company live rollouts are a fact of life. I'd suspect the reason is historical and based on a single person's practical workday, if you extend it to 24/7 then naturally you'd have to have several shifts. Same reason why they are closed on holidays, to give people a break. So I'd suspect it's to benefit the people involved and not the machines which I'm certain can be adapted.
Excellent point! Being able to trade on information revealed overnight would have much greater value than being able to trade at an even smaller sub-second interval.
Since the marginal value of additional liquidity decreases rapidly, I've often wondered if having a fixed resolution (say, one trade per minute) would actually be beneficial.
Nobody can realistically trade a stock based on sub-minute changes in information anyway, and having a fixed resolution would eliminate the advantage some players have by having more servers/etc. After all, if we are chasing liquidity, allowing some players in the market to have an advantage restricts the number of players able to participate which lowers liquidity.
Liquidity during trading hours is important because an open market with little liquidity makes it difficult to to sell and buy assets in significant quantities. Even reasonably sized transaction start having massive effects on price. Short-term price stability gets lost and what you ultimately have is a significant increase in transactions costs.
Ultimately, liquidity during trading hours is a different question from what hours the exchange is open for trading in the first place.
Multiple reasons... History being one. They clear the books after market too, it's a big part of catching the crooks and frauds. Almost certainly makes auditing easier.
Is executing trades quickly bad? Or is flipping an equity quickly bad? I cam see no good that comes from buying and selling in milliseconds; the tax should inversely exponential to the hold time or something.
> popular reporters want to turn HFT into a moral issue and paint HFT firms as evil manipulators, when they really aren't.
First, almost every issue is a moral issue, especially one dealing with the value of a certain endeavor (isn't that what ethics is about? Trying to find the value of things?).
Second, claiming that HFTs aren't evil is as much of an assertion as calling them bullshitters. Most "popular reporters" as you call them (I assume pejoratively) at least support their claim. They say that HFT has little social value, and then claim that putting so much effort into something of little social value is at least morally questionable.
It is claiming that this is not a moral issue that is the more powerful moral assertion here, and quite suspect, at that. Whatever economic risks HFT may entail, its mere existence is first and foremost a problem of ethics.
Much of HFT does have little social value. We could eliminate much of the worst of it by allowing subpenny trading, so trading firms could compete on price instead of on latency.
Maybe you think "sub-pennies? that's just a different kind of insanity." But remember that we're talking per share pricing. So imagine every transaction of every share ever being wrong by an average of half a penny. Imagine you could compete for the money represented by that error, and you could win it, just by having the fastest computers which put in the orders first. Behold: Wall Street as you know it.
I agree that we could and should treat it as a moral issue, and that avoiding those questions is often a sign that something immoral is going on.
But we can also look at it as a system design question: if we're trying to build an efficient, robust marketplace, what activity do we permit and forbid? What do we encourage and discourage?
Having worked for market-makers, I get the value of liquidity. It's not at all clear that HFT firms actually provide liquidity [1], but even if they did, we'd want to ask, "What is the cost of different sorts of liquidity provided, and which ones do we choose to maximize the value of the market to participants and society as a whole?" So far I haven't seen any evidence that HFT activity isn't purely parasitic. In which case it's reasonable to ask whether we should still reward it.
> "...increasing liquidity is the last refuge of bullshitters" is not an argument--it's an assertion.
I believe it's technically an observation, a claim that in the writer's experience, bullshitters fall back on that argument. It's true that he didn't explicitly give evidence for that, but expecting writers to justify every single statement in a short piece that is one of many they write on a topic is another refuge of bullshitters. He's right, though. Bullshitters use that claim because it's a vague, hard-to-verify positive claim that can be made about almost any market activity.
He does support the implied assertion that the claim is bullshit in this case. The only reason we care about liquidity is that you want people the market serves to be able to execute productive trades more quickly and cheaply. If it hasn't gotten cheaper, that's good evidence that HFT trading is not socially useful.
You interestingly also provide evidence that the claim is bullshit. In the article you link, it mentions that the most profitable HFTs aren't liquidity-generating; they are liquidity-taking. That is, they aren't coming into the market with open orders that sit their waiting for other people to take them. They are coming in with orders that match existing offers, removing liquidity from the market. That's from an academic study linked in your article: http://faculty.chicagobooth.edu/john.cochrane/teaching/35150...
"The only reason we care about liquidity is that you want people the market serves to be able to execute productive trades more quickly and cheaply. If it hasn't gotten cheaper, that's good evidence that HFT trading is not socially useful."
That serves as some evidence that it is not socially useful. It completely ignores "more quickly", and for the strongest argument you should also show that nothing else has happened in that time period that would have increased costs and slowed transactions but for HFT.
"the most profitable HFTs aren't liquidity-generating; they are liquidity-taking"
Sure, the easiest way to be among the most profitable HFTs is to cheat, and the way you act on early information is active orders. That doesn't mean they are the most prevalent - I was not able to find actual statistics on the number of each class (aggressive, mixed, passive) represented in the market, but the sample count for trades of aggressive firms was less half of that for the other two.
Edited to add: Actually at a slightly closer glance, it looks like they were looking only at firms that didn't lose money, which seems pretty worthless. "Active strategies have more divergent outcomes" seems a better explanation of the data then "active strategies make more money" - particularly if the reason for the lower sample count is more "active" firms lost money.
None if this is to say that I think there's nothing worth fixing in our financial system, I just want to be sure we're using the evidence we have appropriately.
On the contrary, the idea that HFT increases liquidity is pretty much obvious if you think about it. It's the assertion of the opposite that needs extraordinary proof, and since the author doesn't provide anything at all, he sounds like a bullshitter to me.
You are seriously suggesting that a professor of finance who specializes in studying high-frequency trading is just bullshitting? In a 60-page academic paper on his area of professional expertise? And your view is based on nothing other than the causal intuition of an anonymous commenter called "tutufan"? Gosh, color me convinced.
Yes, market participants on average increase liquidity. Which is why you have that intuition. But it isn't specifically true in all cases. For example, take a simple commodities market where buyers and sellers show up in person to trade wheat. Farmers show up to sell; flour-makers show up to buy. With me so far?
If I place people on the main roads into town and have them buy up all the grain before it reaches the market, I will be reducing market liquidity, because anybody who needs wheat will be totally fucked unless I decide sell to them.
It's not about speed for the sake of speed. That speed allows insider trading and frontrunning.
Insider trading means[0]:
buying or selling a security, in breach of a fiduciary duty or other
relationship of trust and confidence, while in possession of material,
nonpublic information about the security.
How do HFT traders get "material nonpublic information"?
The Wall Street Journal reports that HFT funds buy early access to data
from third-party distributors—everything from corporate earnings to
the Philadelphia Fed's manufacturing survey.
If an analyst at the Philly Fed tells me the results of the manufacturing survey two days in advance of its release, and if I profit from that information and give a kickback to the analyst, that would be clearly illegal.
But if the Philly Fed gives the information to Reuters ten minutes early so they can write a story, and if Reuters sells electronic access to HFT traders two seconds before the public can trade on it, how is that different?
And don't get me started about using HFT for frontrunning client orders[1, 2].
Early access to research reports is not insider information and is not in general illegal.
First, presumably the report was generated from public information so it is not non-public. Second who are the parties involved in a breach of "fiduciary duty or other relationship of trust or confidence"?
I don't get it. The article first criticizes HFT for making markets rather than speculating, incorrectly asserting that it's somehow a tax on traders (hint: don't cross the spread if you don't want to pay the "tax"). Then it reveals that HFT does speculate - they pay people to do market research and trade on that basis, which is somehow also evil.
Damned if they do, damned if they don't I guess.
The authors reasoning in going from HFT engaging in speculation to a financial transaction tax is unclear. He wants to prevent speculation and information gathering? Or prevent people from speculating quickly?
> Damned if they do, damned if they don't I guess.
Why can't the two be bad in their own way? It's like the mob switching from extortion to burglary, and saying, what, you didn't want us threatening people so we're not – now we're just stealing; what more do you want from us? I guess it's damned if we do, damned if we don't...
I missed the part of the article that claimed all speculation is bad.
I did not, however, miss the part of the article that explained why charging for early access to information is socially useful (it pays for the information to be gathered). But I guess if a human uses that info it's ok, while if a machine uses that info it's evil. Or something.
It's not "let's take over the world" bad, it's just a lot of effort expended on something that's of little value. Working a lot towards something that isn't any good could be thought of as a kind of bad.
Yes but what are the unintended side effects & are they worse than what you are curing? Removing the pits in exchange for electronic trading is a huge win. It's unclear how to keep that win & skincare hft.
The author's point is clear - that HFT adds no value to society ("socially worthless").
I don't believe that he wants to prevent anything, but he suggests that trades should be taxed to create some value to society from this. He is suggesting their value (at the moment) is exclusively to the benefit of making rich people - who can pay for access early information and technology - richer.
Well, fortunately for you his journal isn't a quasi-governmental entity.
Unfortunately for your argument, our stock markets are. They wouldn't be remotely viable if they weren't supported and regulated by government. In exchange for the tax payer funded assistance is the social benefit of keeping the whole thing running.
Or would you like to test the viability of a market with no government oversight and no government enforcement of contracts?
How would you build a newspaper or magazine without government enforcement of contracts and copyright?
If you want to claim an HFT shop is "quasi-governmental" because contracts are enforced, then basically every enterprise in the world is "quasi-governmental" (except for the black market).
I don't follow your comparison. Shouldn't it be Atlantic :: Joe's HFT Shop and NYSE :: Copyright Office? You do know that HFTs don't work for NYSE, right?
Of course, our markets are subject to many regulations. I don't see how it follows that we need more regulations, specifically banning or taxing HFT. HFT is already taxed, btw. Everyone pay SEC fees in the US on stock sales and stamp tax in the UK. Traders pay income taxes on their trading income. Common sense says, unless there is some clearly demonstrated harm to society from HFT, leave it alone ( subject to existing regulations)
There is a subset of HFT (Arbitrage) that does have a value to society, because it allows you to trade between markets without fearing that you're somehow losing out (Because the arbritage players would have swept that up).
>allows you to trade between markets without fearing that you're somehow losing out //
The corollary to that is that your trades as a mere producer are never going to be [indirectly] profitable because all potential profits from varying price have been swept up by others who're not producing goods/services but instead are only operating to extract value that would otherwise go to producers.
Arbitrage provides an important financial service to the market... Arbitrage reduces / eliminates price differences across markets. It improves market efficiency.
It's really concerning how little people itt understand about markets
What cost? The only disadvantage is to traders who were previously benefiting from price differences, which only exist at the expense of entities who are losing out due to the same differences.
Traders are already taxed. They make money from their trades and pay income taxes on this trading. If, however, you tax the trading itself, there will be less of it, significantly less and, most likely, the total taxes collected will decrease
This argument seems to apply equivalently to VAT/sales tax, which in my mind makes it weak.
(Consumers are already taxed on their income etc)
There's no reason to believe total taxes collected will decrease. If actors still benefit from HFT post-taxation, they will still trade, and pay the tax.
Sorry but you are clueless. Taxing the trading itself will raise the cost of trading, this making it less profitable
if it is less profitable people will do less of it.
VAT is paid on the difference between what you obtained a good/service for and what you sold it on at. The clue is in the name - "value added". You can even get a refund if you make a loss. A transaction tax would be charged at both ends whether or not you make a profit.
It's plain simple trading luddism and it's been going on for decades. There was massive resistance to the computerisation and networking of the stock markets, which only succumbed via foreign competition.
Lots of people who lived on being in a racket where passing orders and pushing buttons was extremely valuable saw their livelihoods endangered. Now the same happens to people who make a living on trivial short-term market decisions. Computers do it better and quicker.
Here is the problem that I have with this whole "socially useful" line of reasoning: Do we have philosopher kings or benevolent rules who are able to accurately designate social usefullness and ban or allow things on the basis of it? Is facebook or snapchat socially useful? Are hamburgers socially useful? what about french fries? Whether or not HFT is socially useful is irrelevant. Since there is no harm to a long term investor from someone trading 50 millisecond early, etc. , HFT should be left alone to do what it wants to do.
It's not about banning or allowing, it's about counting the true costs and benefits of the trade, not the immediate effects. And you don't need philosopher kings to do this, just basic math and science. This particular article may not make a good case for the harm of HFT, but that doesn't mean there isn't any. And yes, there are serious researchers that are pointing out hidden costs for things like facebook, hamburgers, and french fries. Those things may have demonstrable value, but that doesn't mean the value outweighs the cost or that they are correctly priced. For example, some studies put the true price of a hamburger at around $30 based on the burden put on healthcare and the environment, which are ultimately paid by other people. With perfect information, those costs should be factored into the trade, but they aren't. So, while HFT might have some small benefit to market liquidity as claimed by other comments, I can easily believe there are hidden costs that would outweigh such small benefits. I don't have any evidence to provide in this specific case, but I would support research to investigate whether we are overcounting the benefits or undercounting the costs.
Right, by this logic literally anything might have a hidden cost that exceeds the demonstrable benefit. The onus is on the ones crying wolf to present concrete evidence. Otherwise, we will end up living in Soviet Union or Nazi Germany ( yes yes I know, Godwin's law)
A case could be made that HFT is beneficial to society. The author is incapable of demonstrating exactly how HFT is "bad" beyond just claiming it's "bad". I submit that the speed at which a market can respond to changing conditions is a measure of it's health.
I believe many people would be surprised to learn that they're already engaging in HFT, by way of their pensions at the least. Mom and pop traders have already experienced significant disadvantages with regard to day-trading. Long-term trading is usually best for them.
So you were around a few years ago right? When money for mortgages was easy and people were getting houses left and right, damned if they could afford them. The questionable mortgage-backed securities seemed great on paper. People were buying new houses, the market was humming along. Banks, builders, and anyone else involved was making money hand over fist. What could be wrong with MBS then?
In hindsight, the stupidity of bundling crappy loans for speculation was embarrassing, of course, and anyone not benefitting from the game saw the bubble.
If something looks good on paper, but feels wrong , it means we're missing something. In the case of HFT, it's (quite literally) a breath away from insider trading. Insider trading regulations give the impression that the market isn't rigged. If people lose confidence that they can't trust the market, it will fail. The only way markets work is if they're fair and all the players are playing legally.
I assume folks who advocate for a transaction tax don't actually want less transactions, rather they want more "real" transactions and a less artificially volatile market place.
Unfortunately, a transaction tax would create the exact opposite of that situation. The hypothesis that if there were a transaction tax there would be less transactions is incorrect. What would happen is that transaction quantities would get bigger in order to overcome the new added cost. These larger transactions would magnify the risk at play in the market place. This in turn would raise the reward for being able to pull out of quotes faster and/or to misrepresent the riskiness of your trading strategy.
So a transaction tax would actually incentivize more "false" liquidity and work to the betterment of companies that are more risky.
What HFT systems actually do, is allow firms to "pay" for priority of an order at a price level, by investing in network infrastructure/algorithms. If you want remove that advantage the easiest way would be a system where you transparently pay for priority of an order. The system with the least likely negative side impacts of this would be making arbitrary price level sizes. That is, instead of quoting down only the penny level, let people quote arbitrary (or some fixed but very small) decimals of a penny. That way if you really want to pay up for priority, you can just increment your order slightly and actually pay for the privilege.
We actually have a system similar to what you describe in your last paragraph with the three "inverted" US equity exchanges where liquidity providers pay a fee and liquidity takers receive a rebate. It means that shares posted to the inverted exchanges are cheaper (net of fees) to aggressors than shares posted to other exchanges, so liquidity takers with a smart order router will look first to the inverted exchanges before the other exchanges.
You tend to hear high frequency traders refer to the code that makes pricing and trading decisions as a system, or signal, or model, or (very occasionally) algo (all refer to slightly different things) but I have never heard them refer to the code that makes trading decisions as a bot or algobot.
I'm in the industry, nobody calls it an "algobot". It sounds ridiculous and doesn't really express much.
I'm guessing someone was winding up the reporter, as from reading the article it seems obvious the person is in over their head.
Reminds me of the (possibly apocryphal) story of how a bunch of teenagers made fun of a 20/20 reporter by describing a made up word "mosh pit", and then it caught on.
Anybody that has looking into things like the voodoo of "doji candlestick strategy" etc realizes that the entire market is full of people reading tea leaves.
99% of the portfolio managers, investment professionals have no more luck in picking stock then HFT or these other strategies.
It's basically gambling in one form or another. The ony way to get ahead in that world is to cheat.
HFT by itself isnt; a problem. When juiced with regular insider information, front running your own clients etc it's a massively profitable biz.
The biggest crowd that hates HFT is the stock pickers, day traders (any left?) and others that work int he investment biz.
They have had a nice scam going for the last hundred years and you are ruining their party.
Haw can they go have cocktails at 4 pm every day when computer programmers are working hard all night long?
The other group of course are the luddites. Afraid of any advance in technology. Other favorite causes, "Kids and violent video games". "The 100 mile diet" "environmental anything".
The primary function of the stock market is to exchange ownership (shares) in a company. It's odd that we seem to have forgotten that. What value is there in a computer owning a stock for 10 milliseconds?
I've read elsewhere on here that the value of high-frequency trading is that it reduces transaction costs and increases liquidity in the market. I.e. it makes it easier for the humans to buy and sell at the prices they wish to buy and sell at.
Assuming that's true, the question then becomes what are the costs and externalities of HFT and, in balance, are we willing to make those trade-offs? I haven't seen anything addressing those issues yet, but I haven't been looking either.
HFTs tend to add liquidity when it's least valuable, and they tend to consume liquidity when it's most vital.
For example, an analysis of the 2010 flash crash shows it was worsened by HFTs fleeing their positions once volatility increased, which is the exact time that liquidity and market-making are most valuable.
If there is any social benefit to HFT it is utterly trivial.
That computer is artificially raising the price of the stock for someone who would buy it ... so they marginally either buy less stock, or pay more for each share.
I'm not going to argue that HFT and hedge-funds are necessarily bad (though I don't buy the liquidity argument for stocks that have reasonable volumes), but I don't see how it's helping to fund the company behind the stock at all (or make it attractive to future investors).
In the same way as the bid price is increased by HFT actors (which I think is what you're referring to), the ask price is decreased as well, and your hypothetical buyer would benefit from that.
These are two sides of the same coin, namely HFT decreasing the bid-ask spread, making trading (and thus capital allocation) more efficient across the board.
Sure, but now it's on you to say how long a stock should be owned for, and why that is.
I mean, you could ban HFT and say that you can trade no more than once a second, or a minute, or whatever. Then people would get upset because computers could trade exactly on that second...
> Then we'd race to see who could cancel as close to 5s as possible.
That would reduce the scope of the problem by an order of magnitude or more, because it would limit the benefit of being fast to only those trades to which you yourself are already a party and to which you so happen to receive actionable information at exactly the point in time that the trade is about to close.
And then on top of that, you can put a small penalty (e.g. 1c per share) on canceling a trade to be paid to the other party, which should put a quick end to thoughts of initiating and then canceling several million trades per second that you don't actually want to make.
The primary function of a market is to set prices to facilitate that ownership. The computer is providing value by setting a more accurate price faster.
Early data access has been around for a decade and generally has NOTHING to do with HFT. Events desks typically have very different architecture than other groups in HFT, and, well, are a very very small cog.
> I'm pretty sure—or at least I hope—that Red Auerbach was kidding when he told a gym full of kids to cheat to get ahead.
He didn't tell them to cheat. He told them that to gain competitive advantage you cheat. Games are mostly random so you can get ahead without getting competitive advantage. And you don't even need to get ahead to have almost all benefits of playing the game or even some other benefits that you can't get when you have an advantage.
I think that attitude towards cheaters is pretty much an american (maybe british?) cultural thing. Lot's of people were successfully taught to be honest, and if they can't be honest to defend the ideal of honesty by teaching honesty and never admitting their dishonesty. People who are honest about their dishonesty meet exasperation and disbelieve.
> If a company sold hedge funds an early look at their earnings, it'd be insider trading. But when a third-party like Business Wire sells hedge funds an early, albeit split-second, look at corporate earnings, it's perfectly legal. It's nuts.
Nuts is the fact that insider trading is illegal. It's unenforceable idea of how to make intrinsically unfair game appear sort of fair. It comes from the fact that shares are not as attractive as they need to be on their own. Possessing part of some company and getting dividends when the company decides to pay them is not incentive enough to shell out your cash and give it to the company that needs the cash to develop.
Since people love to participate in lotteries (before taxes it was the way money was gathered for expensive projects, people were just voluntarily were giving their money away in hopes of winning the big prize) they attached sort of casino to the idea of shares. The game is mostly: guess future ratio of supply and demand for pieces of paper. But people don't like to play in the casinos that are known to rig the games and despite the fact that price is random as it depends on so many different pieces of information some information can have some predictable influence. So casino (exchange and companies) pinky swear to prevent anyone from acting on the knowledge that gamers didn't have chance to familiarize themselves with. It works. I makes the game look fair. Of course insider still trading exists because you can't tell it apart from luck if you can't trace where the information leaked. And you can do that only rarely.
I don't know how I personally feel about HFT. I don't have a high enough view of the system as a whole to make a determination if HFT is or will be a problem.
But the mention (http://www.cnbc.com/id/100809395) of Reuters selling data to customers 2 seconds before the conference calls (which occurr 5 minutes before the public receives the data) unsettles me a bit. Two seconds isn't a long time except when you consider that HFT operates in milli, micro, or maybe even nano seconds.
I am not sure whether I would go as far as to consider it insider trading, but I do think the conference call and the data meant for HFT should all be released at the same time as the public data.
But that isn't public data, it is private research.
That a university is doing the work muddies the water, but pretend that a private institute is selling access to its research, what benefit is there in telling it how to sell the data?
What I've been thinking about recently though is that the problems HFT companies work on may have unexpected benefits in other fields. For instance they are working on things like machine learning, transmission speed, long range networking, mathematical modelling, and software. If we were to ban HFT we would lose the potential upside of all this. In the words of NN Taleb, this sort of 'stochastic tinkering' is primarily how scientific progress is made.
An example of privileged, well-connected parties systematically winning asymmetric zero-sum games against the not so well connected.
I'll believe that HFT adds liquidity to the market when the typical retirement horizon is 15 milliseconds. HFT proponents seem not to (or pretend not to) understand diminishing returns where "adding liquidity to the market" is concerned.
When there's no central location towards which orders need to race to get time stamped, the whole low latency arms race seems unnecessary.
There's also no central place to co-locate servers.
Some of the existing traditional (centralized) exchanges are making 20-30%+ of their revenues from co-location and data fees. So they have little incentive to change. They cater to HFT because it's a big driver of their bottom line...
He starts with an anecdote about cheating and then lays out HFT an implies it is cheating without saying how. If he had to defend his assertion that it is cheating he wouldn't have an article.
I've never really understood the stock market. Is this basically how it works?
A person can make or sell things, but that person is limited in the scope of their business by their available capital. Thus, they can increase their capital by either securing a business loan or by making their company "public." Securing a business loan is risky, because they will still have to pay back the loan regardless of whether or not their company makes any money. Going public carries additional risks, but at least they aren't on the hook if the business fails - and there's an added benefit of the potential for enormous gains in capital which can further increase their business potential.
So, the person "goes public" which is extremely complex and time consuming, but let's say they are able to convince 100 people that they should each buy a "share" of the company. This means that the more money that the company earns in profit, that a little bit of that profit is "owned" by each person who owns a share. Right? (I am legitimately asking here, because as I said I really don't understand much of the way it works.)
So, now we have stock exchanges. These are places that people can buy, sell, or trade stocks of different companies for cash or other assets? I own one share of Company A and that share is worth $51 right now. Later in the day, however, we see that company A has earned a little bit more money than we thought it was going to, and so now my stock is worth $53. And I originally purchased the stock for $47, so I can potentially sell that stock for a $6 profit, or I can hang on to it and hope that it goes a little higher.
However, humans can only act so quickly, and day-traders and short-sellers act on stocks in the span of minutes or hours. So if I purchase 10,000 shares of Company B at 10:00 for $5 each, and then sell those same 10,000 shares back at 10:04 for $5.02 each, then I have made a small profit. And large firms do this hundreds of times each day, with dozens of companies, and likely tens of thousands of stocks. Right?
So, HFT does the same thing. Except, instead of making a purchase-sell decision every few minutes, they do it every few microseconds. And the returns per transaction are something like... .0000034 per share (this is a guess), but over tens of thousands of shares, and millions of times a day. Right?
This, however, is where my understanding breaks down completely.
HFT obviously benefits a company that can wield it. If my hedge fund can hire the programmers, run the servers, and buy the licenses to the data then I stand to make huge profits for a minimal investment when my HFT "algobots (lol)" do their thing. But I don't understand how this benefits the rest of the market?
I'm guessing that most of these HFT bots are not being run by small-time investors, and in fact that the trades made by small-time investors will be heavily influenced by the HFT trades that are made in-between the time the guy using E-Trades can point on the "Buy!" button and the time he can click on it.
And as a consumer who does not participate in the stock market (in that I do not have an investment portfolio, I realize that the stock market influences me regardless of whether or not I put money into it), I really don't get how HFT helps me.
What it looks like to me, is that players who have the most money, and who have the best technology will have a benefit over players who lack those resources. And so while there's no evidence (that I'm aware of) that these HFT-using companies are committing any malfeasance, it looks like the natural side-effect is that the market becomes more one-sided.
I would liken this to a professional athlete using steroids (let's pretend that steroids aren't illegal). Steroid use may stem from the player simply wanting to maximize their ability to use their body, and so they enhance their muscles and work hard to be able to control them. This player isn't actively trying to cheat, he is simply using technology to overcome a natural hurdle (let's also assume that this same player has, through hard work, literally pushed their body to the limit of what it can naturally achieve). However, a similar player who has also pushed their body to the limit is either unable or unwilling to use steroids, and thus they are unable to compete against the other due to the slight technical advantage.
I'm not entirely clear on the exact process either, but I think your initial summary has it mostly correct. There are additional complexities in Share Dividends (you receive a fraction of the companies profits proportional to your number of shares owned, which incentivises not-selling, to a point)
The basic issue that HFT (and markets in general) seek to solve is liquidity - the ability to buy & sell when you want, rather than having to wait while a deal is worked out. Consider the differences in process when buying/selling a commodity such as gold, vs buying a particular house.
There's a good overview of the mechanics & benefits of [HF]T in the 'A High Frequency Trader's Apology'[0] series, written by HN member yummyfajitas.
All funds that go into the business will either be debt or equity. Debt gets a guaranteed rate of return, and needs to be paid back. It gets first claim if you go under, but gets no "bonus" if you do well. Equity is an ownership stake; last in line if you go under, but with a claim on all future profits if you do well. The most obvious type of equity stake is your own, but you might say to a friend hey, go halves with me on buying a new lathe, and I'll split the profits from the furniture I make 50/50. That's another example of an equity stake, as old as the hills.
All a stock market is, is your friend saying "look, I've got the note saying I have a right to 50% of the profits of Zac's furniture business, but I'm broke right now; anyone wanna give me $50 for it?". And because in practice this sort of thing is fraught with risk, this is incredibly regulated, but that's all a stock market is; people trading the right to some uncertain future profits. (Well...kinda. There's also the question of control. Some shares give you a say in how a company is run; some don't. That's rarely a factor though.)
Notionally, incidentally, the value of a company's stock is the discounted sum of all future cash flows. If you owe 100% of Amazon, obviously you have the right to 100% of all future profit they make. If you owe 0.0001% of Amazon, you have the right to 0.0001% of all future profit they make. That's the core driver of stock prices; the market's ever-changing estimation of a companies future.
As for HFT...no, you won't make huge profits. The entire HFT industry, globally, makes chicken feed, but they make for VERY entertaining news stories, so you read about them a ton.
Anyhow, as to "why HFT is good", the answer is basically that we all benefit when markets work better, and one way markets can work better is if they are deep and liquid. In simple terms, that means that if you want to buy or sell something, there's always someone there offering to take the other side of the trade for more-or-less the market rate. Conversely, housing is a very shallow, very illiquid market. If you want to sell your $400k house, it might takes weeks or months, and you may find yourself happily paying significant fees to the broker, and maybe even selling it at a discount, just to get the damn thing to sell. If you want to sell your share of Apple stock, it will take microseconds, and you'll get very close to the market rate (ie, low commission/low spread). And while HFT doesn't have a huge impact, to the extent it has an impact, it is to make the market deeper, more liquid, and more efficient. HFT benefits the HFT traders, but it also, and this is really, really, important to grasp benefits every person who trades with the HFT traders. The losers are the "low frequency traders" who would have bought your Apple share from you a little slower and for a little less money, but lost out.
But again, this effect is minimal. The drive for HFT is the race for pennies in an increasingly efficient and competitive market. Small time investors, honestly, aren't the victims here. (Unless they're doing the day-trading, "I can pick stocks because I read a book on trend analysis" thing, in which case...they're absolutely screwed, but no more so now than before HFT. The stock market is not a game.)
And no, I wouldn't say the market is becoming "more one-sided"; that presupposes there being two sides. There aren't; there are seven billion sides. HFT does not profit at the expense of pension funds or entrepreneurs; it profits at the expense of everyone else who wanted to profit from them.
And I think the sports analogy is especially inapt. We want markets to work as efficiently as possible. We want sports to provide a spectacle. These things are not similar.
Approach A: If I own 100% I would clearly get 100% of all future profits. If I owned 50% (ie, if this was a joint venture between me and my friend Joe), then...I'd have a claim to 50% of all future profits. By extension, X% of ownership gives a claim to X% of the future profits. Your share of Amazon may be tiny, but if someone wanted to buy Amazon outright, they'd need to buy your share; the value of that share to the potential buyer is proportional to the value of Amazon as a whole.
Approach B: Every dollar of profit that Amazon makes is either paid out in dividends, or is retained and re-invested in order to garner future profits. The same is true for future profits. However, all things are finite, so at some point the company will be wound up and liquidated; any profits that have not been disbursed to shareholders via dividends will be disbursed at this time. Ergo, every dollar of profit is eventually disbursed to shareholders.
(Ah, you say, but it might be a decade or more before Amazon pays dividends or is wound up. But when you go to sell your shares, the same analysis holds, recursively. Your share of Amazon has value because you can sell it to someone who will buy it because they can sell it to someone who will buy it because [...] they want a share of Amazon's future dividends.)
Or to put it another way: A company has assets and liabilities; if you net these out (ie, sell off all the assets and pay off all the liabilities) you get a "book value". But a company almost always is valued at well above its book value: Amazon at 17 times book value. In other words, it would cost you 17 times more to buy Amazon than it would to just build an exact replica of all their warehouses and infrastructure (and patents, and brand awareness, and goodwill, etc.). Why? What do you buy when you launch a hostile takeover of Amazon other than all those assets? Answer: Their future profits. That's the only thing left to have value.
When they decide to forgo paying dividends, that money is usually put to other uses by investing it (case Amazon) or stockpiled in cash (case Apple).
In both cases the value of your 0.0001% slice has increased, and even though you won't get an instant transfer of that value, you will see it in the appreciation in the market price of your slice.
The problem is someone is always going to get important information and act on it first in a market. A tax wouldn't stop that, it would just make small transactions more expensive (for both parties.) I don't know if this is a real problem or how to fix it but this article is entirely useless.
maybe i didn't read the piece accurately enough, but i don't get why it's cheating. It's about ingenuity and the ability to allocate money to where you think the market will move. It's been this way since the beginning. We do the samething with our 401k.
With a very few exceptions, modern trading is a form of cheating, based on mass-media powered deceptions (we have full-time satellite channel - TLC, which promotes premium (read: overpriced) and/or "chap-but-healthy" fast-food chains) and "optimizations" such as purchasing a "30% meat stuff" at a penny price and adding lots of spices and synthetic sauces, etc.)
Why should it be different in finance? Especially in speculative trading.)
The stock exchange has just become the ultimate casino today. Yesterday, stock exchange helped to build companies, to have some security against bad crops and so on ... but that has changed. More and more money is just made by gambling and the more money is made, the more money is again put into the big gambling machine. It is legal, but just gambling and we all have to pay the price, because the gamblers carry the wealth of the Earth away -- and the others are left empty.
Actually, HFT is socially useful in the same way that Cold War research, even though most of it never went anywhere, is.
It bids up the price of talent, and that's an inherent social good because it means there is a chance for smart people to get into decision-making positions (which, otherwise, go to entitled, and mostly untalented, incumbents and their shitty offspring). Google and Amazon would not be paying $140k per year for mid-career software engineers, were it not for the hedge funds paying $200k.
VC-istan is terrible, with founders lucky to get 10% and earliest employees getting 0.1-1%, but if Wall Street wasn't absorbing most of the top talent (and it is) those numbers would be closer to 1% and 0.001-0.05%. Instead of very few people getting rich in the tech lottery, it'd be almost no one, because the founders and early engineers would have zero leverage.
The HN crowd likes to assume that talented people will, as if it were a law of nature, have options to rise economically and socially. It's not so. If it weren't for socially useless talent vampires like HFT and online ad targeting, talent would have even less leverage against the good-ol'-boy networks and widespread stagnation would ensue.
(High levels of funding, probably originating from governments at first, for basic research would achieve the same effect in a socially useful way, but I wouldn't hold my breath.)
Transaction volume is ultimately not the important metric--revenue is. And, following [1], it seems that the total revenue for HFT was probably around $2Billion in 2013--for a whole industry, that's not very much! Measuring transaction volume is akin to comparing shipping between Amazon and Walmart ignoring the fact that Amazon ships directly to consumers while Walmart mostly ships to large Walmart stores.
"...increasing liquidity is the last refuge of bullshitters" is not an argument--it's an assertion. That was not really supported. Liquidity is a good thing; the article claims that HFT does not help much because most of the actual benefits happened before its advance. Of course, considering how limited HFT revenue is compared to other forms of trading, it's likely that the benefits are just smaller in proportion.
So I don't see, from the article, that HFT is necessarily socially useless. Rather, I see that it is likely useful in a moderately small way spread out over a lot of people (most people in the markets). The benefit is not obvious or concrete, but that doesn't mean it doesn't exist.
Similarly, the article complains about how bots just quote each other prices without necessarily making a trade. I don't see how this is a bad thing. All it means is that their quotes are at a much higher resolution than manual quotes, that's all. This seems like it would generally be a good thing.
Now, I'm not saying that HFT is not without its own risk or issues--they're just not the issues brought up in the article. Or, in fact, in most popular articles: popular reporters want to turn HFT into a moral issue and paint HFT firms as evil manipulators, when they really aren't. The actual risks of HFT are more structural and technical, which, I suppose, is not great for a broad audience or lots of pageviews!
It's also not immediately clear that HFT should be banned or how to deal with it. Many proposals I've heard would reduce liquidity beyond affecting just HFT, raising real costs for consumers. Ultimately, this is why there has not been much regulation in the space!
[1]: http://247wallst.com/investing/2013/03/24/high-frequency-tra...