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For as long as there have been financial markets, there have been people playing the role of market makers, HFTs are just the latest incarnation (although HFTs

by toth 11y ago

For as long as there have been financial markets, there have been people playing the role of market makers, HFTs are just the latest incarnation (although HFTs are not exclusively market makers, it does tend to be the largest chunk of their volumes). Market makers are people that take no long term view on price movements, just try to provide liquidity in the short run, collecting the spread and trying not to to accumulate positions that are too large either way. Without market makers, prices would be much more volatile (they would just move a round lot because of short term fluctuations of supply and demand with no long term predictive power). Basically you can think that market makers charge you a small (very small in case of HFTs) fee in exchange for the risk they run for holding inventory for a little bit and in the process reduce volatility. Before HFTs, market makers were people that had seats at exchanges, which had much more of an information advantage over normal market participants and who certainly charged much larger fees and ripped off people more. The current system, with HFTs playing that role, is by any measure better for both retail and institutional investors. (disclaimer, am an HFT trader)

oojgaoj 11y ago
There's an important fact to remember though: HFTs aren't really making markets. HFTs make markets when markets least need liquidity, and they consume liquidity by fleeing the markets when it is most valuable. As such, an HFT provides service when it is least valuable, and he doesn't just stop providing the service, he actively consumes the resources when they're most needed by society. edit: downvote me if you like, but what I'm saying is absolutely true. HFTs consume liquidity as vol increases.
- toth 11y ago
  This is an often repeated claim, but things do not become true by repetition. First of all, HFTs have certainly taken over market making functions in today's markets, almost entirely in equities, to a lesser extent in some other asset classes. Yes, it is true that some HFTs will stop trading during extreme volatility events (but they are not consuming volatility either, merely not providing it any more). But the same was true of human market makers of the past (there is a famous story of NASDAQ brokers simply stopping to answer their phones during crashes in the '80s, even though they were required to always make markets by regulation) - so who are you comparing them too? The flip side is that HFTs (as any market maker) make more money when the volatility is high, so they have strong incentives to get back in there providing liquidity.
  - oojgaoj 11y ago
    First of all, stop conflating HFT with other, actually useful, forms of algorithmic trading. Secondly, when an HFT sells out their inventory (which is the most typical response to vol), they consume liquidity on their way out. If they held the inventory what you said would be true, but they don't. Third, the idea of strong incentives for HFTs in the case of high vol sounds true, but isn't. HFTs flee because their models don't cover the fat tail scenarios and/or there's the concern that they'll get on the wrong side of a broken trade. Some non-HFT algos do this, but HFT basically doesn't. You're trying to steal credit from actually useful people here. "But the same was true of human market makers of the past..." This is my favorite part of your rant. You admit that you were lying, but then pretend it's fine because 30 years ago markets were also filled with sociopaths. Today's real market makers are mostly algorithmic, but they're distinctly not HFT. > This is an often repeated claim, but things do not become true by repetition. And yet there you are, repeating lies again and again... I guess I'd lie too, if the truth meant that my entire career was dedicated to something that is a net negative to society; if it meant admitting that my entire existence consisted of finding ways to capture value that other (better) people created. Yeah... I'd lie too if I was you.
    - toth 11y ago
      I am happy to discuss these issues, but would rather have a fact based discussion than resort to insults. Firstly, not sure what you think the distinction is between HFTs as opposed and "algorithimic market makers". I think most people would equate them, for instance most would agree that firms like Virtu Financial and Knight Capital Group are both HFT firms and market makers (for instance, they are Designated Market Makers on many NYSE securities, the closest thing we have to an "official" market maker these days). Second, HFTs definitely make more money in moderate to high vol (the current period of prolonged low vol in the markets has been pretty hard for the sector), and during those periods it seems even you agree that they are providing liquidity - and I would argue, adding value. During extreme vol events, yes HFTs will pull out of the market, but so does everybody else. If they can manage it, they will liquidate positions, but their books are small relative to other players, I am skeptical that this is an important factor in further increasing vol, will stand corrected if you can point to me evidence it is. If HFT is really making vol worse, then why are we not seeing higher vol since it became prevalent? Certainly, we have had periods of great macro uncertainty in the last half a dozen years, but there was no apocalypse in the market. Finally, my point in bringing up the NASDAQ broker example, is that HFTs perform an important function as market makers. If you want to get rid of HFT and do not propose who's going to take their place, I have to assume we would go back to the old system of human market makers. I think pointing out their flaws is entirely fair. It's easy to demonize HFTs, but nobody forces you to trade with them. It would be relatively easy to setup a darkpool that does not allow HFTs to trade there. Some people have tried this (or at least to market the notion that they tried), but inevitably they decide they need HFT liquidity and end up courting them instead.

by toth 11y ago

oojgaoj 11y ago

There's an important fact to remember though: HFTs aren't really making markets. HFTs make markets when markets least need liquidity, and they consume liquidity by fleeing the markets when it is most valuable. As such, an HFT provides service when it is least valuable, and he doesn't just stop providing the service, he actively consumes the resources when they're most needed by society. edit: downvote me if you like, but what I'm saying is absolutely true. HFTs consume liquidity as vol increases.

toth 11y ago
This is an often repeated claim, but things do not become true by repetition. First of all, HFTs have certainly taken over market making functions in today's markets, almost entirely in equities, to a lesser extent in some other asset classes. Yes, it is true that some HFTs will stop trading during extreme volatility events (but they are not consuming volatility either, merely not providing it any more). But the same was true of human market makers of the past (there is a famous story of NASDAQ brokers simply stopping to answer their phones during crashes in the '80s, even though they were required to always make markets by regulation) - so who are you comparing them too? The flip side is that HFTs (as any market maker) make more money when the volatility is high, so they have strong incentives to get back in there providing liquidity.
- oojgaoj 11y ago
  First of all, stop conflating HFT with other, actually useful, forms of algorithmic trading. Secondly, when an HFT sells out their inventory (which is the most typical response to vol), they consume liquidity on their way out. If they held the inventory what you said would be true, but they don't. Third, the idea of strong incentives for HFTs in the case of high vol sounds true, but isn't. HFTs flee because their models don't cover the fat tail scenarios and/or there's the concern that they'll get on the wrong side of a broken trade. Some non-HFT algos do this, but HFT basically doesn't. You're trying to steal credit from actually useful people here. "But the same was true of human market makers of the past..." This is my favorite part of your rant. You admit that you were lying, but then pretend it's fine because 30 years ago markets were also filled with sociopaths. Today's real market makers are mostly algorithmic, but they're distinctly not HFT. > This is an often repeated claim, but things do not become true by repetition. And yet there you are, repeating lies again and again... I guess I'd lie too, if the truth meant that my entire career was dedicated to something that is a net negative to society; if it meant admitting that my entire existence consisted of finding ways to capture value that other (better) people created. Yeah... I'd lie too if I was you.
  - toth 11y ago
    I am happy to discuss these issues, but would rather have a fact based discussion than resort to insults. Firstly, not sure what you think the distinction is between HFTs as opposed and "algorithimic market makers". I think most people would equate them, for instance most would agree that firms like Virtu Financial and Knight Capital Group are both HFT firms and market makers (for instance, they are Designated Market Makers on many NYSE securities, the closest thing we have to an "official" market maker these days). Second, HFTs definitely make more money in moderate to high vol (the current period of prolonged low vol in the markets has been pretty hard for the sector), and during those periods it seems even you agree that they are providing liquidity - and I would argue, adding value. During extreme vol events, yes HFTs will pull out of the market, but so does everybody else. If they can manage it, they will liquidate positions, but their books are small relative to other players, I am skeptical that this is an important factor in further increasing vol, will stand corrected if you can point to me evidence it is. If HFT is really making vol worse, then why are we not seeing higher vol since it became prevalent? Certainly, we have had periods of great macro uncertainty in the last half a dozen years, but there was no apocalypse in the market. Finally, my point in bringing up the NASDAQ broker example, is that HFTs perform an important function as market makers. If you want to get rid of HFT and do not propose who's going to take their place, I have to assume we would go back to the old system of human market makers. I think pointing out their flaws is entirely fair. It's easy to demonize HFTs, but nobody forces you to trade with them. It would be relatively easy to setup a darkpool that does not allow HFTs to trade there. Some people have tried this (or at least to market the notion that they tried), but inevitably they decide they need HFT liquidity and end up courting them instead.