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So I see the issue here is one of integrity - claiming to enforce one policy when you're really enforcing a different one. But why are High Frequency Traders "

So I see the issue here is one of integrity - claiming to enforce one policy when you're really enforcing a different one. But why are High Frequency Traders "bad"? Like, do they significantly destabilize the platforms they use? Or is it just that they make profit, and thus the other users of the exchange are losing money? And if it's the latter, how is that not completely illogical? In order for you to make a profit when trading, somebody else needs to lose money. If you ban everyone who profits from the exchange, then there cannot be an exchange, right? This is probably ECON 101 stuff right here - I probably sound clueless, and it's because I am. Please help this poor, confused lad out?

andrewksl 11y ago
It's probably not right to classify all HFT as unscrupulous. However, consider the kind of algorithm that picks up when you're looking for a big amount of stock X, and then proceeds to race you to the other exchanges in an effort to buy from under you; it's pretty hard to justify that as anything other than predatory. Making money from speculation (i.e. investing) is one thing, but gaming the system for profit is something else entirely, and something that quite inarguably does not add value.
- wallacoloo 11y ago
  Thanks for the great example. It definitely clears up some of my confusion.
marincounty 11y ago
I'm not an expert either. I have know two successful traders. By successful, I mean they made a living, and were employed. Both barely passed the series 7 exam. They both used inside information when trading. Both were in denial. Both had a lot of money. A lot of it in the Cayman Islands. I still see a lot of inside information being thrown around. Hell, the only real money my deceased father made in the market was off an insider tip from his father in-law. My father asked me, "Should I do it?" Me, "Dad--you literally broke your back with honest construction work, and only certain members of your family appreciate what you put your body through. Yes--do it, and enjoy the money!" That said, I'm a little jaded when it comes to stock trading. I basically believe most are cheating. Since I don't believe there are honest traders(not day traders who did well in bull markets), doesn't mean they don't exist? Why should an honest trader pay more for a stock just because Computer that is physically close to one of the exchanges sees his order? I don't want to argue with anyone. Preventing HFT trading, or at least the guys who are trying to literally sit on the exchanges seems like an easy fix? I don't know why they don't stop it?
- kasey_junk 11y ago
  > Why should an honest trader pay more for a stock just because Computer that is physically close to one of the exchanges sees his order? It is not possible to see any traders orders before they execute on any exchange that I know of. Regardless of colocation, custom built asics etc. That people believe this is possible is largely down to a lack of understanding of how exchanges work and the fact that many powerful market participants (hedge funds and ibanks) are natural competitors to HFT firms. > I don't want to argue with anyone. I completely understand and commiserate, that said I hope it doesn't count as arguing when you clear up factual incorrectness rather than opinions.
deleted 11y ago
[deleted]
lmm 11y ago
> But why are High Frequency Traders "bad"? Like, do they significantly destabilize the platforms they use? Or is it just that they make profit, and thus the other users of the exchange are losing money? And if it's the latter, how is that not completely illogical? In order for you to make a profit when trading, somebody else needs to lose money. If you ban everyone who profits from the exchange, then there cannot be an exchange, right? Theoretically you make your profit from long-term value investing. If you think FooCorp has a bright future ahead of them and I think their industry is in decline, I can sell you my FooCorp shares. And theoretically we've worked for any money we make: maybe I've done some research and uncovered a massive fraud at FooCorp. Maybe you're an activist who's going to talk to their management about a major restructuring plan[1]. You can run an exchange just with value investors like that, but you won't get a lot of trades - see the mention of Liquidnet in the article. Maybe you finish your plan a week before I finish mine. So maybe there's a middleman who'll sell you some FooCorp shares (going short), and then buy the same shares off me a week later, taking a cut for themselves. On one level they're providing a valuable service - but you can see why you and I, who did all this research effort, might hate some people who sit there with a computer being a middleman and raking in near-riskless profit. In the same way that we might hate a real-world middleman - a salesman or importer or the like. It becomes particularly acute if the middleman is an HFT selling shares that we "could have got on our own" five seconds later at a better price than their price (because they have an information advantage from e.g. direct feeds being faster than the SIP). In one sense they are still providing value, but it's a strange, counterintuitive kind of value. And of course people remember the times when they bought and the price went down a second later more than the times when they bought and the price went up, and it's easy to blame the HFTs for it. [1] Why is this not just zero-sum? Because ultimately the market cap turns into real investment. If the market overall thinks that BarCorp has a great business plan and FooCorp is wasting money, then the price of BarCorp goes up and that of FooCorp goes down, and maybe BarCorp builds a new factory and FooCorp lays some people off. Assuming the market got it right, BarCorp's factory is more efficient than FooCorp's, so they build more useful widgets with the same money, and the world has more widgets in it than in the counterfactual universe where the companies' prices didn't change - real value creation

andrewksl 11y ago

It's probably not right to classify all HFT as unscrupulous. However, consider the kind of algorithm that picks up when you're looking for a big amount of stock X, and then proceeds to race you to the other exchanges in an effort to buy from under you; it's pretty hard to justify that as anything other than predatory. Making money from speculation (i.e. investing) is one thing, but gaming the system for profit is something else entirely, and something that quite inarguably does not add value.

wallacoloo 11y ago
Thanks for the great example. It definitely clears up some of my confusion.

marincounty 11y ago

I'm not an expert either. I have know two successful traders. By successful, I mean they made a living, and were employed. Both barely passed the series 7 exam. They both used inside information when trading. Both were in denial. Both had a lot of money. A lot of it in the Cayman Islands. I still see a lot of inside information being thrown around. Hell, the only real money my deceased father made in the market was off an insider tip from his father in-law. My father asked me, "Should I do it?" Me, "Dad--you literally broke your back with honest construction work, and only certain members of your family appreciate what you put your body through. Yes--do it, and enjoy the money!" That said, I'm a little jaded when it comes to stock trading. I basically believe most are cheating. Since I don't believe there are honest traders(not day traders who did well in bull markets), doesn't mean they don't exist? Why should an honest trader pay more for a stock just because Computer that is physically close to one of the exchanges sees his order? I don't want to argue with anyone. Preventing HFT trading, or at least the guys who are trying to literally sit on the exchanges seems like an easy fix? I don't know why they don't stop it?

kasey_junk 11y ago
> Why should an honest trader pay more for a stock just because Computer that is physically close to one of the exchanges sees his order? It is not possible to see any traders orders before they execute on any exchange that I know of. Regardless of colocation, custom built asics etc. That people believe this is possible is largely down to a lack of understanding of how exchanges work and the fact that many powerful market participants (hedge funds and ibanks) are natural competitors to HFT firms. > I don't want to argue with anyone. I completely understand and commiserate, that said I hope it doesn't count as arguing when you clear up factual incorrectness rather than opinions.

deleted 11y ago

[deleted]

lmm 11y ago

> But why are High Frequency Traders "bad"? Like, do they significantly destabilize the platforms they use? Or is it just that they make profit, and thus the other users of the exchange are losing money? And if it's the latter, how is that not completely illogical? In order for you to make a profit when trading, somebody else needs to lose money. If you ban everyone who profits from the exchange, then there cannot be an exchange, right? Theoretically you make your profit from long-term value investing. If you think FooCorp has a bright future ahead of them and I think their industry is in decline, I can sell you my FooCorp shares. And theoretically we've worked for any money we make: maybe I've done some research and uncovered a massive fraud at FooCorp. Maybe you're an activist who's going to talk to their management about a major restructuring plan[1]. You can run an exchange just with value investors like that, but you won't get a lot of trades - see the mention of Liquidnet in the article. Maybe you finish your plan a week before I finish mine. So maybe there's a middleman who'll sell you some FooCorp shares (going short), and then buy the same shares off me a week later, taking a cut for themselves. On one level they're providing a valuable service - but you can see why you and I, who did all this research effort, might hate some people who sit there with a computer being a middleman and raking in near-riskless profit. In the same way that we might hate a real-world middleman - a salesman or importer or the like. It becomes particularly acute if the middleman is an HFT selling shares that we "could have got on our own" five seconds later at a better price than their price (because they have an information advantage from e.g. direct feeds being faster than the SIP). In one sense they are still providing value, but it's a strange, counterintuitive kind of value. And of course people remember the times when they bought and the price went down a second later more than the times when they bought and the price went up, and it's easy to blame the HFTs for it. [1] Why is this not just zero-sum? Because ultimately the market cap turns into real investment. If the market overall thinks that BarCorp has a great business plan and FooCorp is wasting money, then the price of BarCorp goes up and that of FooCorp goes down, and maybe BarCorp builds a new factory and FooCorp lays some people off. Assuming the market got it right, BarCorp's factory is more efficient than FooCorp's, so they build more useful widgets with the same money, and the world has more widgets in it than in the counterfactual universe where the companies' prices didn't change - real value creation