4 ms·

You make the assumption that they would trade. That assumption is only valid because of people like me. I don't need to justify my activity, nor do I want to

You make the assumption that they would trade. That assumption is only valid because of people like me. I don't need to justify my activity, nor do I want to go that route--my point is that the fact that participants can realistically expect a fill is not something that happens because of magic.

crux_ 17y ago
> You make the assumption that they would trade. That assumption is only valid because of people like me. You make the same assumption yourself, every time you trade. The entire purpose of high frequency trading is to beat others to good deals -- not to do a better job of discovering good deals.
- brownegg 17y ago
  Completely untrue. Pure speed games are "winner take most", and brutally difficult. It is very hard to win on speed.
  - andrewcooke 17y ago
    so how do you win? my naive impression is that speed must play an important part, or it wouldn't be called high frequency. (so speed is important to you, just as water is important to a fish; it may not be what you focus on, but that doesn't mean that it's not critical).
    - brownegg 17y ago
      It's crucial, for sure. But there are trades for which it is the only determinant, and those are dangerous waters. There are market participants who make their money on pure latency arbitrage; it is a 100% speed game (because anyone can figure out that 1 - 1 = 0). The majority of HFT falls into the "you have to be fast enough to not get run over" bucket.
      - andrewcooke 17y ago
        ok, so i think the original thread here is arguing that "being run over" is just the market doing what it would do anyway, without you playing in the traffic and endangering us all...
  - crux_ 17y ago
    If it's completely untrue, then I'd like to hear about how your computerized trades ever "discover" a good deal. I'm fairly sure this is the answer: They don't -- instead, they're just good at noticing, very quickly, the actions of the market actors who do. Which is just another way of saying that they're about beating others to the deal. (I'd also guess that they're probably also quite good at handing recreational day-trader's asses to them.)
    - ad 17y ago
      It's a little less black and white. Suppose I put a guy with a physics PhD in a dark room for a while and he tells me 'with 99% probability, a stock with a price-to-earnings ratio of under 10 will beat the S&P 500 the next year". So whenever a stock's ratio gets below 10, I buy the stock and short the S&P 500 and wait for the bags of money to arrive. In that case, I'm not really relying on noticing the actions of others who have discovered a good deal. Yet, I am keenly interested in beating anyone to the stock when the ratio gets to 9.99. In reality, the market signals are more complicated statistical relationships, they could just as easily arise from someone being very dumb, instead of very smart. Or just the result of random variation that day.
      - crux_ 17y ago
        And yet, even for your hypothetical, you use the term "market signals." ;) If you look at markets through an information-centric lens, it seems possible to draw a clear distinction between actions that introduce external data and those that are pure acts of deduction, no matter how brilliant.
orborde 17y ago
Let me explain what I think the parent is getting at. Say there is a $20/share sell order registered on the exchange. Then another investor submits a $30/share buy order. As I understand it, at this point HFTs jump in, buy out the sell order at $20/share, and then resell the shares to fill the buy order at $30/share, pocketing a $10/share profit. The question is, why can't the buy and sell orders be matched directly, allowing the buyer to pocket the discount off the price he was willing to pay, instead of the difference going to an HFT with access to the incoming order stream? What possible benefit is provided to the market by skimming off the difference like this? The behavior I talked about above is one of the objections to HFT as it's currently practiced, and I'd like to know whether it reflects a misunderstanding.
- yummyfajitas 17y ago
  The buy and sell orders are matched directly. Orders are filled in order of price (best first) and time (first to place order, if price is equal).
- ad 17y ago
  Obviously in this kind of pure arbitrage situation, the world would be a better place If seller A and buyer B are matched up directly. But rarely would this kind of situation come up. There was this nytimes article a while back that describe something similar to the above scenario in context of a 'flash order', and I think everyone thinks this is what HFT is. For a normal retail order this should not happen. But for the flash order described in the nytimes article, the truth is a little more complicated. The buyers and sellers were not immediately matched up in that case. Why? The buyer was trying to hide the fact that they were trying to buy, by using a flash order. The gamble is they could find another pocket of liquidity before sending it to the open market. But in this case the gamble failed-- they would've been better off sending it directly. There are many controversies about flash trading and how it skirts Reg NMS. If you read the flash trading page in wikipedia there's some good info by the BATS people in the Forbes link.
richardw 17y ago
Well, by definition it's true for all trades that would occur without your help. In those cases, you're taking a couple cents and making it more expensive for at least one of the other participants. That would cover, say, any institutional investor who is moving into a position. In terms of you justifying HFT activity, of course not. There have always been advantaged participants and HFT traders are simply those today. But the article was trying to justify HFT as manna for all participants, which seems unlikely considering how much money the industry is extracting for their liquidity-providing services.

crux_ 17y ago

> You make the assumption that they would trade. That assumption is only valid because of people like me. You make the same assumption yourself, every time you trade. The entire purpose of high frequency trading is to beat others to good deals -- not to do a better job of discovering good deals.

brownegg 17y ago
Completely untrue. Pure speed games are "winner take most", and brutally difficult. It is very hard to win on speed.
- andrewcooke 17y ago
  so how do you win? my naive impression is that speed must play an important part, or it wouldn't be called high frequency. (so speed is important to you, just as water is important to a fish; it may not be what you focus on, but that doesn't mean that it's not critical).
  - brownegg 17y ago
    It's crucial, for sure. But there are trades for which it is the only determinant, and those are dangerous waters. There are market participants who make their money on pure latency arbitrage; it is a 100% speed game (because anyone can figure out that 1 - 1 = 0). The majority of HFT falls into the "you have to be fast enough to not get run over" bucket.
    - andrewcooke 17y ago
      ok, so i think the original thread here is arguing that "being run over" is just the market doing what it would do anyway, without you playing in the traffic and endangering us all...
- crux_ 17y ago
  If it's completely untrue, then I'd like to hear about how your computerized trades ever "discover" a good deal. I'm fairly sure this is the answer: They don't -- instead, they're just good at noticing, very quickly, the actions of the market actors who do. Which is just another way of saying that they're about beating others to the deal. (I'd also guess that they're probably also quite good at handing recreational day-trader's asses to them.)
  - ad 17y ago
    It's a little less black and white. Suppose I put a guy with a physics PhD in a dark room for a while and he tells me 'with 99% probability, a stock with a price-to-earnings ratio of under 10 will beat the S&P 500 the next year". So whenever a stock's ratio gets below 10, I buy the stock and short the S&P 500 and wait for the bags of money to arrive. In that case, I'm not really relying on noticing the actions of others who have discovered a good deal. Yet, I am keenly interested in beating anyone to the stock when the ratio gets to 9.99. In reality, the market signals are more complicated statistical relationships, they could just as easily arise from someone being very dumb, instead of very smart. Or just the result of random variation that day.
    - crux_ 17y ago
      And yet, even for your hypothetical, you use the term "market signals." ;) If you look at markets through an information-centric lens, it seems possible to draw a clear distinction between actions that introduce external data and those that are pure acts of deduction, no matter how brilliant.

orborde 17y ago

Let me explain what I think the parent is getting at. Say there is a $20/share sell order registered on the exchange. Then another investor submits a $30/share buy order. As I understand it, at this point HFTs jump in, buy out the sell order at $20/share, and then resell the shares to fill the buy order at $30/share, pocketing a $10/share profit. The question is, why can't the buy and sell orders be matched directly, allowing the buyer to pocket the discount off the price he was willing to pay, instead of the difference going to an HFT with access to the incoming order stream? What possible benefit is provided to the market by skimming off the difference like this? The behavior I talked about above is one of the objections to HFT as it's currently practiced, and I'd like to know whether it reflects a misunderstanding.

yummyfajitas 17y ago
The buy and sell orders are matched directly. Orders are filled in order of price (best first) and time (first to place order, if price is equal).
ad 17y ago
Obviously in this kind of pure arbitrage situation, the world would be a better place If seller A and buyer B are matched up directly. But rarely would this kind of situation come up. There was this nytimes article a while back that describe something similar to the above scenario in context of a 'flash order', and I think everyone thinks this is what HFT is. For a normal retail order this should not happen. But for the flash order described in the nytimes article, the truth is a little more complicated. The buyers and sellers were not immediately matched up in that case. Why? The buyer was trying to hide the fact that they were trying to buy, by using a flash order. The gamble is they could find another pocket of liquidity before sending it to the open market. But in this case the gamble failed-- they would've been better off sending it directly. There are many controversies about flash trading and how it skirts Reg NMS. If you read the flash trading page in wikipedia there's some good info by the BATS people in the Forbes link.

richardw 17y ago

Well, by definition it's true for all trades that would occur without your help. In those cases, you're taking a couple cents and making it more expensive for at least one of the other participants. That would cover, say, any institutional investor who is moving into a position. In terms of you justifying HFT activity, of course not. There have always been advantaged participants and HFT traders are simply those today. But the article was trying to justify HFT as manna for all participants, which seems unlikely considering how much money the industry is extracting for their liquidity-providing services.