4 ms·

The "new" part of this news, which not many have responded to here, is the notion of an HFT tax. The arguments on either side of HFT (liquidity/spread/etc. vs.

by sjbase 11y ago

The "new" part of this news, which not many have responded to here, is the notion of an HFT tax. The arguments on either side of HFT (liquidity/spread/etc. vs. cost/unfairness/etc.) have been largely unchanged for the last few years. There simply isn't enough data made public to declare a victor. As far as the tax: personally I'm very in favor of slowing down trading... unfortunately, what's being proposed introduces as much structural game theory as it eliminates. What's the dominant strategy for a trader faced with a rule like "any trades resting for less than 300 micros get taxed"? To be as fast as possible without triggering the tax; staying just above the threshold. All that economic waste on low-latency tech will just be redirected to low-jitter tech. Those who can reliably land an order within +1 microsecond of the tax line will outperform those who only have an accuracy of +10. I'd like to see more exchanges experimenting with things like random variance in speed bump size, frequent batch auctions, etc.

kasey_junk 11y ago
Or you could just get rid of the sub-penny rule and let HFT compete on price.
yummyfajitas 11y ago
There is enough data to declare that a transaction tax is a loser. Canada tried it. The bid/ask spread rose 9%. This resulted in a transfer of wealth from retail investors to institutional ones. http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeChange_submission_KM_AP3.pdf http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeCh...
Mikeb85 11y ago
> personally I'm very in favor of slowing down trading... As a retail trader, no. As an example, yesterday I placed a sell order on $90,000HK worth of a stock. Once I hit 'send', my order was fulfilled before my browser could load the confirmation page, and at the market price I was quoted seconds before. This is, in large part, thanks to market makers who use HFT. Before this, the broker/market maker might take a spread worth half a percent or more (and being a retail investor, you probably wouldn't get the 'market' price), now it's pennies or less, and at the market price. Thanks to HFT, spreads are smaller, execution quicker, and it definitely 'levels' the playing field.
- sigmar 11y ago
  HFT exists because low latency trading exists. Not the other way around. >it definitely 'levels' the playing field. Have you read Michael Lewis's Flash Boys? Because HFT demonstrably doesn't level the playing field.
  - Mikeb85 11y ago
    Levels the playing field for retail investors. If your entire strategy is arbitrage, then of course you're going to lose out to someone who is quicker and has better technology. Of course some people who lost out on 'low hanging fruit' are going to be mad someone else bought a bigger ladder. But if your strategy is anything else (investing or any type of speculative trading) then HFT benefits you. I've traded on markets with low liquidity and no HFT, and high liquidity with HFT. I don't miss the low-liquidity markets, waiting half a day to see your order executed only to see the price move against you because no one could match your order, meanwhile institutional traders are trading the same stock outside the exchange is the worst kind of infuriating. The argument against HFT is like saying that bank tellers who exchange currency for a 2% spread are cheating out back-alley money changers who take a 20% spread... Yes someone is losing, but it's not necessarily a bad thing.
- sjbase 11y ago
  I completely agree that liquidity is first and foremost, and that in today's market structure HFT drives a lot of it. Retail enjoys a lot of the benefit, because trades in the $1,000s - $100,000s range probably aren't enough to slip the market. But is ultra-low-latency the ONLY way to bring about that liquidity? I have yet to come across any economic or technical reason why that has to be the case. Also, slowing down trading doesn't mean eliminating HFT, it's a matter of what constitutes "high" frequency... I'd argue we're well past the point where incremental increases in speed result in equal gains in liquidity. And those increments now cost more than ever before.
  - Mikeb85 11y ago
    When incremental gains are no longer worthwhile, institutions will no longer invest in the infrastructure. As long as the profit gained > costs, they will invest in infrastructure, to the benefit of the tech industry. And you're right, we don't need market makers trading as fast or as frequently as they do, but they see an opportunity, so they go for it, and we benefit anyway. I'd personally be happy with 10 second execution, but if I can get 1/2 second execution, why would I complain?

by sjbase 11y ago

kasey_junk 11y ago

Or you could just get rid of the sub-penny rule and let HFT compete on price.

yummyfajitas 11y ago

There is enough data to declare that a transaction tax is a loser. Canada tried it. The bid/ask spread rose 9%. This resulted in a transfer of wealth from retail investors to institutional ones. http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeChange_submission_KM_AP3.pdf http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeCh...

Mikeb85 11y ago

> personally I'm very in favor of slowing down trading... As a retail trader, no. As an example, yesterday I placed a sell order on $90,000HK worth of a stock. Once I hit 'send', my order was fulfilled before my browser could load the confirmation page, and at the market price I was quoted seconds before. This is, in large part, thanks to market makers who use HFT. Before this, the broker/market maker might take a spread worth half a percent or more (and being a retail investor, you probably wouldn't get the 'market' price), now it's pennies or less, and at the market price. Thanks to HFT, spreads are smaller, execution quicker, and it definitely 'levels' the playing field.

sigmar 11y ago
HFT exists because low latency trading exists. Not the other way around. >it definitely 'levels' the playing field. Have you read Michael Lewis's Flash Boys? Because HFT demonstrably doesn't level the playing field.
- Mikeb85 11y ago
  Levels the playing field for retail investors. If your entire strategy is arbitrage, then of course you're going to lose out to someone who is quicker and has better technology. Of course some people who lost out on 'low hanging fruit' are going to be mad someone else bought a bigger ladder. But if your strategy is anything else (investing or any type of speculative trading) then HFT benefits you. I've traded on markets with low liquidity and no HFT, and high liquidity with HFT. I don't miss the low-liquidity markets, waiting half a day to see your order executed only to see the price move against you because no one could match your order, meanwhile institutional traders are trading the same stock outside the exchange is the worst kind of infuriating. The argument against HFT is like saying that bank tellers who exchange currency for a 2% spread are cheating out back-alley money changers who take a 20% spread... Yes someone is losing, but it's not necessarily a bad thing.
sjbase 11y ago
I completely agree that liquidity is first and foremost, and that in today's market structure HFT drives a lot of it. Retail enjoys a lot of the benefit, because trades in the $1,000s - $100,000s range probably aren't enough to slip the market. But is ultra-low-latency the ONLY way to bring about that liquidity? I have yet to come across any economic or technical reason why that has to be the case. Also, slowing down trading doesn't mean eliminating HFT, it's a matter of what constitutes "high" frequency... I'd argue we're well past the point where incremental increases in speed result in equal gains in liquidity. And those increments now cost more than ever before.
- Mikeb85 11y ago
  When incremental gains are no longer worthwhile, institutions will no longer invest in the infrastructure. As long as the profit gained > costs, they will invest in infrastructure, to the benefit of the tech industry. And you're right, we don't need market makers trading as fast or as frequently as they do, but they see an opportunity, so they go for it, and we benefit anyway. I'd personally be happy with 10 second execution, but if I can get 1/2 second execution, why would I complain?