4 ms·

Like low frequency trading, HFT makes the market more efficient, at least theoretically. The same logic that makes low frequency trading beneficial makes HFT be

Like low frequency trading, HFT makes the market more efficient, at least theoretically. The same logic that makes low frequency trading beneficial makes HFT beneficial, although HFT may not be as beneficial as low frequency trading.

repsilat 10y ago
Right. Arbitrage is generally a matchmaking problem. You identify people who want to trade with each other but can't find each other directly, and you facilitate a trade between them for a small fee, taking on some risk. The result is that if you want to sell, you're less likely to sell below much below the going rate if there are decent arbrigateurs around. If you want to buy, you probably won't have to pay too much of a premium over the market price. Another point: assuming prices move "smoothly," as arbers get faster they make less and less money. Their profits go in proportion to the "crossing of the spread," so they make more money when the guy who wants to buy is willing to pay a lot more than the guy selling is asking. But if the buyer slowly puts his bid price up and up, the Nash equilibrium strategy for competing arbers is not to wait for a fat payout, because someone else will get it ahead of you -- you snatch up the deal as soon as it appears, when the spread has only just crossed enough for you to make a tiny profit. In the limit of arbitrarily fast arbitrage being detected and acted on, with no cost of executing orders, the arbers make no money at all, and the value traders buy and sell at the same price (paying nothing for the matchmaking service.) Edit: market making is a different beast, and needs different supporting arguments. Providing a better price than the next guy seems like a worthy public service, though. And of course this shouldn't whitewash abuses like front-running, which really do make markets worse.
- jandrese 10y ago
  > Right. Arbitrage is generally a matchmaking problem. You identify people who want to trade with each other but can't find each other directly, and you facilitate a trade between them for a small fee, taking on some risk. But how can they not find each other? They're in the same market. Too often it seems like it's "I'd like to buy X for $10", but "X is being sold for $9.99 from Y, so I'll buy that up and mark it up a penny as a service instead of having the other guy just buy it directly for that price." Basically it's making money off of the information asymmetry from having faster machines than the guy who is buying for real. There is almost no risk, the only way to be left holding the bag is if the seller cancels in the 50ish nanoseconds it takes you to buy up the original stock and relist it at the new price". At the end of the day your outstanding risk is 0 unless you've screwed up real bad. And of course once you have the system in place to do this, it's easy to see a trade for X at $10 and buy up all of the X to relist at $10.00. Here there is slightly more risk since the original buyer may not re-bid at $10.01, but even then as long as you stick to stocks that are moving regularly the risk is small.
  - slededit 10y ago
    > They're in the same market No they aren't in the same market. There are a large number of different pools and small exchanges where trading happens. The limitations of physics mean each forum will have different prices at different times. Different forums also have different rules on who may trade and in what way. HFT Helps arbitrage away these differences. Lowering the spread between differing markets. HFT can also play a part in ensuring correlation of related assets like futures.
    - jandrese 10y ago
      Isn't that moot though? Every trading house is going to have all of the markets baked into their systems. There aren't going to be any companies that only trade on only one particular exchange unless they have some advantage on that exchange that they can't get on other exchanges. Even then I expect them to cross reference the other exchanges to make sure their preferred market isn't out of whack.
      - slededit 10y ago
        This gets very complicated mostly because its physically impossible to guarantee the best price in all exchanges at the exact point the order was entered. You simply cannot transmit the order fast enough. Brokers are required to fill at the National Best Bid and Offer price which is specifically defined as the best bid on the national quotation system. However the NQS can only update so fast. Your broker may well know it can get a better price on a specific exchange. Fidelity will actually keep track of when it gets you a better price and inform you with their "Price Improvement" statistics. Other brokerages will sell your orderflow and let a third party take the difference instead.
  - consz 10y ago
    They're either not on the same exchange, or they're not in the same moment (ie. HFT is buying at time X with the expectation they can sell for a profit at time X+epsilon).
  - repsilat 10y ago

repsilat 10y ago

Right. Arbitrage is generally a matchmaking problem. You identify people who want to trade with each other but can't find each other directly, and you facilitate a trade between them for a small fee, taking on some risk. The result is that if you want to sell, you're less likely to sell below much below the going rate if there are decent arbrigateurs around. If you want to buy, you probably won't have to pay too much of a premium over the market price. Another point: assuming prices move "smoothly," as arbers get faster they make less and less money. Their profits go in proportion to the "crossing of the spread," so they make more money when the guy who wants to buy is willing to pay a lot more than the guy selling is asking. But if the buyer slowly puts his bid price up and up, the Nash equilibrium strategy for competing arbers is not to wait for a fat payout, because someone else will get it ahead of you -- you snatch up the deal as soon as it appears, when the spread has only just crossed enough for you to make a tiny profit. In the limit of arbitrarily fast arbitrage being detected and acted on, with no cost of executing orders, the arbers make no money at all, and the value traders buy and sell at the same price (paying nothing for the matchmaking service.) Edit: market making is a different beast, and needs different supporting arguments. Providing a better price than the next guy seems like a worthy public service, though. And of course this shouldn't whitewash abuses like front-running, which really do make markets worse.

jandrese 10y ago
> Right. Arbitrage is generally a matchmaking problem. You identify people who want to trade with each other but can't find each other directly, and you facilitate a trade between them for a small fee, taking on some risk. But how can they not find each other? They're in the same market. Too often it seems like it's "I'd like to buy X for $10", but "X is being sold for $9.99 from Y, so I'll buy that up and mark it up a penny as a service instead of having the other guy just buy it directly for that price." Basically it's making money off of the information asymmetry from having faster machines than the guy who is buying for real. There is almost no risk, the only way to be left holding the bag is if the seller cancels in the 50ish nanoseconds it takes you to buy up the original stock and relist it at the new price". At the end of the day your outstanding risk is 0 unless you've screwed up real bad. And of course once you have the system in place to do this, it's easy to see a trade for X at $10 and buy up all of the X to relist at $10.00. Here there is slightly more risk since the original buyer may not re-bid at $10.01, but even then as long as you stick to stocks that are moving regularly the risk is small.
- slededit 10y ago
  > They're in the same market No they aren't in the same market. There are a large number of different pools and small exchanges where trading happens. The limitations of physics mean each forum will have different prices at different times. Different forums also have different rules on who may trade and in what way. HFT Helps arbitrage away these differences. Lowering the spread between differing markets. HFT can also play a part in ensuring correlation of related assets like futures.
  - jandrese 10y ago
    Isn't that moot though? Every trading house is going to have all of the markets baked into their systems. There aren't going to be any companies that only trade on only one particular exchange unless they have some advantage on that exchange that they can't get on other exchanges. Even then I expect them to cross reference the other exchanges to make sure their preferred market isn't out of whack.
    - slededit 10y ago
      This gets very complicated mostly because its physically impossible to guarantee the best price in all exchanges at the exact point the order was entered. You simply cannot transmit the order fast enough. Brokers are required to fill at the National Best Bid and Offer price which is specifically defined as the best bid on the national quotation system. However the NQS can only update so fast. Your broker may well know it can get a better price on a specific exchange. Fidelity will actually keep track of when it gets you a better price and inform you with their "Price Improvement" statistics. Other brokerages will sell your orderflow and let a third party take the difference instead.
- consz 10y ago
  They're either not on the same exchange, or they're not in the same moment (ie. HFT is buying at time X with the expectation they can sell for a profit at time X+epsilon).
- repsilat 10y ago