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Something this article ignores, and which is ignored by most articles on HFT, is that the process is ilegible to the public. "No no we're doing you a favor!" is
by gbhn 11y ago
Something this article ignores, and which is ignored by most articles on HFT, is that the process is ilegible to the public. "No no we're doing you a favor!" is not reassuring when the activity consumes a bunch of resources on zero sum activity.
Ultimately investing runs on trust. HFT is consuming public trust in the financial system at a prodigious rate. Is it a trillion dollars a year? A billion? Hard to be sure. But it certainly isn't clear the tiny market-making improvements are worth it.
- harryh 11y agoLots of things are illegible to the public. Explain to me all the processes involved in building the smart phone in your pocket. You can't. I can't. Probably no single person in the world can. Who cares?
- dopamean 11y agoI think the illegibility of it is important if it is affecting other people's finances.
- harryh 11y agoNearly every good or service that you purchase is backed by a nearly illegible process of global trade. That doesn't affect your finances?
- pjc50 11y agoDoesn't it? The illegibility of offshore money affecting overall tax take and therefore government spending, services, and jobs? The illegibility of jobs disappearing to ... somewhere? Not knowing if you've bought products that have been manufactured by slave labour or just awful working conditions? It's not clear.
- crdoconnor 11y ago>Nearly every good or service that you purchase is backed by a nearly illegible process of global trade. That doesn't affect your finances? Yes it has, but why would you consider that a good thing? CAFTA and NAFTA have been pretty horrendous for the finances of Americans and TTIP and TPP are likely to be even worse. They can't be killed unless enough people understand them, either.
- lmm 11y agoNo-one is being made worse-off by HFT except professional market-makers (who are being outcompeted) and perhaps professional buy-side traders (whose secrets leak out faster), both of whose job it is to understand the market. If you're a nonprofessional you should be investing with Vanguard or the like, and you benefit from HFT. If a layman with no expertise tries day-trading they're going to lose their money either way; we do have "must have this much money to be allowed to trade" laws, but those are controversial too for obvious reasons.
- crdoconnor 11y agoThere's a pretty strong chance that your retirement funds are not being cannibalized by Samsung or Apple. Whereas, with HFT...
- joosters 11y agoEven if we all accept that HFTs are 'stealing' fractions of a penny per trade, just how often do you trade your retirement funds?
- djyaz1200 11y agoMuch more often than you might think. Every time we make a deposit (likely monthly/bi/weekly) that money needs to be deployed (aka stock purchased). If we are part of a big fund that fund may need to buy stocks in huge chunks and when the HFT sniffs out what they are buying they will raise the price.
- nick_dm 11y agoThe price has to go up anyway, that's what happens when demand increases, it's nothing to do with HFT. Large block trades like this will often be arrange over the counter (OTC) or on dark pools, so the fund purchasing the shares will get a fixed price and it's up to the market maker to deal with the execution risk in the open market. Edit: As Harryh said, large mutual fund managers believe that HFT allows them to get better prices for their customers: http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-frequency-trading-firms.html http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f...
- harryh 11y agoVanguard (the manager of the world's biggest funds) has consistently stated that HFT market making has lowered their trading costs and increased returns for investors.
- crdoconnor 11y agoUsually it's done on your behalf by institutional investors. The costs will be passed on to you in the form of less money once you retire.
- librvf 11y ago> Lots of things are illegible to the public. Explain to me all the processes involved in building the smart phone in your pocket. You can't. I can't. Probably no single person in the world can. Who cares? That's not true, not like HFT anyway. First, you can quickly and succinctly describe the traits and benefits of a smartphone. You can be high-level at first, you don't have to explain how every detail works. There's no question, for example, that a touch screen doesn't actually work as advertised. You can just say that a smartphone is a cellular/wireless computer device with a usefully large touch-screen display. In contrast, the unknown question with High-Frequency Trading is: is it actually providing value to anyone but the traders themselves? They might say they are "market-making" but are they really market-making (a trading role with proven market value) or are they merely exploiting structural inefficiencies in the trading infrastructure that mostly hurt everybody else? Maybe they are, but they should be able to describe it in a high level terms first (market-making, liquidity, etc.) where their role provides an obvious benefit to the market, and if you don't understand the high-level terms (eg liquidity) you can look them up. So far as I can tell (and I am willing to be proved wrong here) there is no consensus answer to the question of whether HFT is actually valuable to markets.
- harryh 11y agoI can quickly and succinctly describe the traits and benefits of HFT: Replacing slow expensive humans with fast and cheap computers has dramatically reduced the cost of trading. You can see this because buy/sell spreads have shrunk by at least 10x.
- librvf 11y agoThat's not what High-Frequency Trading means. The terms for what what you describe are the more general "electronic trading" and "automated trading". They enable HFT, but are not HFT. High-Frequency Trading, while also an umbrella term, virtually always refers to a subset of algorithmic trading involving arbitrage over extremely short timeframes. HFT is not about being faster than "slow expensive humans" it's about being microseconds faster than other HFTs.
- kasey_junk 11y ago> when the activity consumes a bunch of resources on zero sum activity The thing to remember about the markets is that each individual trade is always zero sum, but the value of the markets comes from the aggregate total. The behaviors that we want in our markets, price discovery, liquidity, easy risk management are all outcomes that are enabled by speculative market participants like market makers engaging in lots of zero sum activity. So instead of decrying the zero sum activity what we want to do is drive down the price of it to the non zero sum participants. And HFT market making has been prodigiously good at that.
- Retric 11y agoTrading is not a zero sum activity, trades happen because each side want what the other person has more than what they have which is a net positive. aka I want lunch more than money. HFT trading is zero sum because the traders don't actually want or keep stock.
- harryh 11y agoGrocery store owners don't want vegetables either. They just want to hold them a little while before they sell them to you. Are they zero sum?
- Retric 11y agoGrocery stores trade low cost bulk purchases for lot's of little transactions. However, stock markets already preform this function.
- harryh 11y agoYes, and in order the markets to perform this function they needs lots of active participants with differing investing time horizons. Without market makers markets tend to be very inefficient at their job.
- ycombobreaker 11y agoNo, stock markets do not perform the same function as grocery stores. Grocery stores take on inventory risk by purchasing (in bulk) the goods that they think they can sell. If their inventory goes unsold or spoils, they lose. Stock markets provide a _venue_ for trading, but it is the market maker which takes on the inventory risk. An appropriate analogy would be that the grocery store is renting from a separate property owner. The property owner collects rent from the grocery store, just as stock markets collect "rent" (trading fees, colocation fees, system access fees) from market makers. In both cases, the inventory risk is managed by the middleman (grocery store, market maker).
- joosters 11y agoPlease please please keep the phrase 'zero sum' out of this. It'll only encourage pointless arguing about whether or not something is zero sum. It does not matter if trading is/isn't zero sum. Or perhaps you can explain why it matters?
- JoeAltmaier 11y agoIts a pivotal issue. Zero sum means no value is being added by the process - its entropic. Such processes can be dispensed with, to the benefit of all.
- joosters 11y agoYou're missing the point, It doesn't mean that at all. Plenty of things could be dispensed with for the benefit of all, zero-sum or not. ZS is not a magic flag that shows something is worthless.
- JoeAltmaier 11y agoDisagree; it is exactly that flag. Other things may be even worse than zero, of course.
- joosters 11y agoPeople seem to think that 'zero-sum' is an analytic shortcut to declaring something good/bad. You can't actually do this, however neat it seems. You have to consider all the difficult-to-quantify social impacts and intricacies too. Almost every attempt to declare something zero sum will miss out relations, factors, dependencies and links because the model they pick is too simple. Hence the never-ending arguments about trying to define something ZS or not.
- JoeAltmaier 11y agoThat I can agree with wholeheartedly. But I'd add, HFT is like kids playing soccer on the freeway. They don't create value for anybody but themselves, and they screw up things for everybody else. I wish they would go away.