7 ms·

As a mostly lay person, for me it's vilified because my understanding of it is that HFT has a significant advantage over my own personal trading, and that throu

by modoc 10y ago

As a mostly lay person, for me it's vilified because my understanding of it is that HFT has a significant advantage over my own personal trading, and that through this advantage HFTs are able to make "more" profits than would be possible without HFT. My brain tells me that some of these profits are likely at my own trades' expense, and that while markets and economies rise and fall, my own profits are negatively impacted by HFT. That may not be accurate, but that's why I personally feel uncomfortable with HFT.

harryh 10y ago
Rather than seeing HFTs as competing against you, a more accurate model is to see various firms competing against each other to service your needs at the lowest possible cost. These firms used to be staffed with expensive and slow humans, but by automating they are able to deliver a service to you at a much lower cost than was previously possible. The story of automation in the financial markets is similar to the story of automation in many other businesses.
- modoc 10y ago
  How does that really help me if I'm buying/selling a specific stock (vs. being in a larger fund, etc...)? My, again very lay, understanding is that the HFT is likely to push my buy price up slightly and make money in the middle of me a non-HFT seller, and push down the price slightly on the sale side, again making money as a very fast middleman. I may have that completely wrong though.
  - harryh 10y ago
    It helps you in 2 ways: 1) It reduces the bid/ask spread. There isn't just one price for a stock, there are two. The price at which you can buy and the price at which you can sell. The price at which you can sell is lower. So when you buy a share of stock you are immediately down a little bit. This amount is called the spread. By automating firms can reduce this spread which does the opposite of what your intuition told you. It will bring buy prices down slightly and sell prices up slightly. 2) It helps make sure that prices are as accurate and up to date as possible. When you go to buy a share of $GOOG you probably aren't really sure if it should cost 775.40 or 775.45 or 775.50. You just figure it's a good company and likely to go up in the future. But because there are all these firms working really hard and acting really fast you can be pretty confident that whatever price you buy at at any given time contains the total available knowledge currently available in the world about Google's future potential.
  - tedunangst 10y ago
    If you think HFT is going to push up the buy price, set your limit a penny lower and wait a second for the "slow" traders to handle it. (If that's how you think markets work.)
    - harryh 10y ago
      Adverse selection! ;-)
  - infinite8s 10y ago
    What you are missing is that in the old days, your buy/sell order was probably handled by a human market maker instead of an HFT's algo, who would push up/down the price much more than 'slightly', hence making you pay more in trading costs. The biggest opponents of HFTs are the major financial institutions who used to provide those market making roles.
  - fleitz 10y ago
    Unless you are exceeding the liquidity on a single exchange HFT will never affect you. Here how it works... Imagine you want to BUY 10000 MSFT... You send your order to exchange A, it does a partial fill for 1000 orders, and sends the remainder to exchanges b,c,d. An HFT firm sees your order to exchange A knows its not going to fill and sends its own orders to buy the liquidity on B,C,D and then sends sell orders at a higher price to B,C,D, your order fails to fill and you have to issue a new order at a higher price. Since retailers will very likely never exceed the liquidity on a single exchange they'll never have any issue with HFT and will just experience increased liquidity and faster fills. However, if you're a large dinosaur still sending huge orders now you'll need a group of suckers who want to trade only with you, enter IEX, and 'consumer' protection from HFT on their exchanges who now has a large pool of suckers to trade with.
    - harryh 10y ago
      And how do you convince the suckers to go to IEX? Incredibly cynical marketing! https://www.youtube.com/watch?v=v2OZkTesSx0 https://www.youtube.com/watch?v=v2OZkTesSx0
    - tuna-piano 10y ago
      I kind of agree with your underlying premise, but when I invest in a mutual fund / ETF, isn't that a giant investor that might be affected by HFT? And if that was costing the fund money, wouldn't that affect me (without me seeing it directly)?
      - kasey_junk 10y ago
        Assuming that hft forms didn't drive other prices down. In particular the costs to trade (in the form of the spread, fees & execution costs) hadn't been decimated by hft firms.
    - usefulcat 10y ago
      "You send your order to exchange A, it does a partial fill for 1000 orders, and sends the remainder to exchanges b,c,d. An HFT firm sees your order to exchange A knows its not going to fill and sends its own orders to buy the liquidity on B,C,D and then sends sell orders at a higher price to B,C,D, your order fails to fill and you have to issue a new order at a higher price." Maybe, but that seems like a pretty risky strategy. A simpler and far less risky strategy that would look very similar (admittedly only if you're looking exclusively at orders on the book and not fills) would be for HFT market makers to cancel or reprice their existing resting orders on exchanges B, C, D in response to getting or seeing a large fill on A. In the strategy described by the parent, in addition to having to cross the spread, the HFT firm would also be at the back of the line at the next price level (unless maybe they already have an order there? but no guarantee that it's the right size, or maybe they have multiple small orders and cancel whatever is in excess of the position..). So I'm genuinely curious: is what the parent describes something that is really that commonly done? This is one of the things that made me highly skeptical of Flash Boys. It seemed to me they observed a phenomenon, came up with a single explanation for it and never even considered any other possibilities that didn't fit the chosen narrative.
- moefogs 10y ago
  You've described a valuable part of algorithmic trading. It's a social good, and it creates value for everyone involved. It's a good thing. When informed people want to defend HFT, they often point to this type of activity, because it's automated trading that happens pretty quickly (sounds like HFT), and it's easy to love. But when informed people criticize HFT, they're talking about other activities. They're criticizing schemes wherein the HFT identifies that a real (read: risk taking) market participant is willing to pay $10.04, that a second real market participant is willing to sell for $10.02, and that those participants will learn of each other's existence in a half millisecond. But instead of allowing that half millisecond to pass, the HFT buys at $10.02, sells at $10.04, and captures a profit before those first two orders can match. But it doesn't matter. If your wallet is stolen one time in your whole life, that single event will likely cost you more than HFT will.
- deleted 10y ago
  [deleted]
physguy1123 10y ago
Short story: HFT is generally considered good for retail traders because spreads tend to be lower. You trade both more cheaply and more quickly. However, it's generally not good for large institutions (which are more than just 'big evil hedge funds') because markets react very quickly to movements caused by this big firms. If they decide that something is priced wrong, they won't be able to make many trades taking advantage of that. https://www.bloomberg.com/view/articles/2016-02-25/-flash-boys-exchange-isn-t-about-the-little-guy https://www.bloomberg.com/view/articles/2016-02-25/-flash-bo...
- naveen99 10y ago
  I see HFT as good for everyone. Market has a hard time reacting to option spreads when the long option is executed prematurely. I don't see why big players can't use them. Also the market can't react too predictably. Because then the big player could just yank the market around and profit. Some of this is limited by regulations on large holders / insiders.
  - lmm 10y ago
    It limits the ability of value investors who do fundamentals research to profit. Arguably those investors are the ones who actually ensure efficient allocation of capital (the supposed purpose of the market). There's kind of a paradox of efficient markets - the more efficient the market is, the less value can be gained selling information to it.
    - sseveran 10y ago
      It does no such thing. Market makers prefer not to interact with people that have a directional view as they may move the market. If a market maker gets caught with inventory and the price is moving they will lose money. Market makers tend to be less involved in price formation then other types of investors.
      - lmm 10y ago
        > It does no such thing. Market makers prefer not to interact with people that have a directional view as they may move the market. If a market maker gets caught with inventory and the price is moving they will lose money. Are you claiming this doesn't impact the profitability of those people with directional views?
tptacek 10y ago
You don't do the kind of trading HFTs do. No matter whether trading is done with hand signals or in FPGAs, you were never going to be making markets. Meanwhile, cost of trading for normal people like us has gone through the floor. And we're only really looking at the last 15 years when we think about trading costs, but even steeper reductions precede that, and it was all brought about by replacing human market makers --- who are crooked as a barrel of fishhooks --- with automated systems. Respectfully --- I don't know you, and this isn't a personal comment --- but my guess is that you distrust HFT because you've been told to distrust it. If you do even the most superficial cui bono analysis, you'll see the people most interested in making you believe that are themselves major financial institutions, all of them far larger than the HFTs. It wasn't HFTs that brought down the economy in '07-'08. It was their adversaries.
- patio11 10y ago
  The only disagreement I have with Thomas here is the last line. Securitization groups at the large banks and HFTs aren't adversaries -- they don't interact in any meaningful fashion. Large banks, taken as a whole, have some groups which are in competition with HFTs but have other groups which are their happy customers. (If you're a large bank, and you're taking liquidity, you are either astoundingly bad at your job or you actually desire to be buying what HFTs are selling.) The industry standard for buying/selling mortgage-backed securities or collateralized debt obligations isn't HFT. It isn't even automated. It is one sweating jock yelling at another sweating jock over a recorded telephone call. You can see this dramatized in The Big Short, where to unwind the shorts that the "good guys" have made they have to get their own not-quite-sweating not-quite-jock played-by-Brad-Pitt to do the phone calls on their behalf.
  - kchoudhu 10y ago
    > It isn't even automated. Yes. No. Maybe. There's a massive push towards exchange trading the more liquid products: traders are expensive, and if you can get a robot to do basic inventory management and market making for you (even with a human in the loop), that's savings for a desk manager looking to cut costs in a highly straightened FI environment. The highly distressed and/or exotic stuff that people are talking about in the Big Short are still slung by salespeople, with the connivance/approval of traders.
deleted 10y ago
[deleted]

by modoc 10y ago

harryh 10y ago

Rather than seeing HFTs as competing against you, a more accurate model is to see various firms competing against each other to service your needs at the lowest possible cost. These firms used to be staffed with expensive and slow humans, but by automating they are able to deliver a service to you at a much lower cost than was previously possible. The story of automation in the financial markets is similar to the story of automation in many other businesses.

modoc 10y ago
How does that really help me if I'm buying/selling a specific stock (vs. being in a larger fund, etc...)? My, again very lay, understanding is that the HFT is likely to push my buy price up slightly and make money in the middle of me a non-HFT seller, and push down the price slightly on the sale side, again making money as a very fast middleman. I may have that completely wrong though.
- harryh 10y ago
  It helps you in 2 ways: 1) It reduces the bid/ask spread. There isn't just one price for a stock, there are two. The price at which you can buy and the price at which you can sell. The price at which you can sell is lower. So when you buy a share of stock you are immediately down a little bit. This amount is called the spread. By automating firms can reduce this spread which does the opposite of what your intuition told you. It will bring buy prices down slightly and sell prices up slightly. 2) It helps make sure that prices are as accurate and up to date as possible. When you go to buy a share of $GOOG you probably aren't really sure if it should cost 775.40 or 775.45 or 775.50. You just figure it's a good company and likely to go up in the future. But because there are all these firms working really hard and acting really fast you can be pretty confident that whatever price you buy at at any given time contains the total available knowledge currently available in the world about Google's future potential.
- tedunangst 10y ago
  If you think HFT is going to push up the buy price, set your limit a penny lower and wait a second for the "slow" traders to handle it. (If that's how you think markets work.)
  - harryh 10y ago
    Adverse selection! ;-)
- infinite8s 10y ago
  What you are missing is that in the old days, your buy/sell order was probably handled by a human market maker instead of an HFT's algo, who would push up/down the price much more than 'slightly', hence making you pay more in trading costs. The biggest opponents of HFTs are the major financial institutions who used to provide those market making roles.
- fleitz 10y ago
  Unless you are exceeding the liquidity on a single exchange HFT will never affect you. Here how it works... Imagine you want to BUY 10000 MSFT... You send your order to exchange A, it does a partial fill for 1000 orders, and sends the remainder to exchanges b,c,d. An HFT firm sees your order to exchange A knows its not going to fill and sends its own orders to buy the liquidity on B,C,D and then sends sell orders at a higher price to B,C,D, your order fails to fill and you have to issue a new order at a higher price. Since retailers will very likely never exceed the liquidity on a single exchange they'll never have any issue with HFT and will just experience increased liquidity and faster fills. However, if you're a large dinosaur still sending huge orders now you'll need a group of suckers who want to trade only with you, enter IEX, and 'consumer' protection from HFT on their exchanges who now has a large pool of suckers to trade with.
  - harryh 10y ago
    And how do you convince the suckers to go to IEX? Incredibly cynical marketing! https://www.youtube.com/watch?v=v2OZkTesSx0 https://www.youtube.com/watch?v=v2OZkTesSx0
  - tuna-piano 10y ago
    I kind of agree with your underlying premise, but when I invest in a mutual fund / ETF, isn't that a giant investor that might be affected by HFT? And if that was costing the fund money, wouldn't that affect me (without me seeing it directly)?
    - kasey_junk 10y ago
      Assuming that hft forms didn't drive other prices down. In particular the costs to trade (in the form of the spread, fees & execution costs) hadn't been decimated by hft firms.
  - usefulcat 10y ago
    "You send your order to exchange A, it does a partial fill for 1000 orders, and sends the remainder to exchanges b,c,d. An HFT firm sees your order to exchange A knows its not going to fill and sends its own orders to buy the liquidity on B,C,D and then sends sell orders at a higher price to B,C,D, your order fails to fill and you have to issue a new order at a higher price." Maybe, but that seems like a pretty risky strategy. A simpler and far less risky strategy that would look very similar (admittedly only if you're looking exclusively at orders on the book and not fills) would be for HFT market makers to cancel or reprice their existing resting orders on exchanges B, C, D in response to getting or seeing a large fill on A. In the strategy described by the parent, in addition to having to cross the spread, the HFT firm would also be at the back of the line at the next price level (unless maybe they already have an order there? but no guarantee that it's the right size, or maybe they have multiple small orders and cancel whatever is in excess of the position..). So I'm genuinely curious: is what the parent describes something that is really that commonly done? This is one of the things that made me highly skeptical of Flash Boys. It seemed to me they observed a phenomenon, came up with a single explanation for it and never even considered any other possibilities that didn't fit the chosen narrative.
moefogs 10y ago
You've described a valuable part of algorithmic trading. It's a social good, and it creates value for everyone involved. It's a good thing. When informed people want to defend HFT, they often point to this type of activity, because it's automated trading that happens pretty quickly (sounds like HFT), and it's easy to love. But when informed people criticize HFT, they're talking about other activities. They're criticizing schemes wherein the HFT identifies that a real (read: risk taking) market participant is willing to pay $10.04, that a second real market participant is willing to sell for $10.02, and that those participants will learn of each other's existence in a half millisecond. But instead of allowing that half millisecond to pass, the HFT buys at $10.02, sells at $10.04, and captures a profit before those first two orders can match. But it doesn't matter. If your wallet is stolen one time in your whole life, that single event will likely cost you more than HFT will.
deleted 10y ago
[deleted]

physguy1123 10y ago

Short story: HFT is generally considered good for retail traders because spreads tend to be lower. You trade both more cheaply and more quickly. However, it's generally not good for large institutions (which are more than just 'big evil hedge funds') because markets react very quickly to movements caused by this big firms. If they decide that something is priced wrong, they won't be able to make many trades taking advantage of that. https://www.bloomberg.com/view/articles/2016-02-25/-flash-boys-exchange-isn-t-about-the-little-guy https://www.bloomberg.com/view/articles/2016-02-25/-flash-bo...

naveen99 10y ago
I see HFT as good for everyone. Market has a hard time reacting to option spreads when the long option is executed prematurely. I don't see why big players can't use them. Also the market can't react too predictably. Because then the big player could just yank the market around and profit. Some of this is limited by regulations on large holders / insiders.
- lmm 10y ago
  It limits the ability of value investors who do fundamentals research to profit. Arguably those investors are the ones who actually ensure efficient allocation of capital (the supposed purpose of the market). There's kind of a paradox of efficient markets - the more efficient the market is, the less value can be gained selling information to it.
  - sseveran 10y ago
    It does no such thing. Market makers prefer not to interact with people that have a directional view as they may move the market. If a market maker gets caught with inventory and the price is moving they will lose money. Market makers tend to be less involved in price formation then other types of investors.
    - lmm 10y ago
      > It does no such thing. Market makers prefer not to interact with people that have a directional view as they may move the market. If a market maker gets caught with inventory and the price is moving they will lose money. Are you claiming this doesn't impact the profitability of those people with directional views?

tptacek 10y ago

You don't do the kind of trading HFTs do. No matter whether trading is done with hand signals or in FPGAs, you were never going to be making markets. Meanwhile, cost of trading for normal people like us has gone through the floor. And we're only really looking at the last 15 years when we think about trading costs, but even steeper reductions precede that, and it was all brought about by replacing human market makers --- who are crooked as a barrel of fishhooks --- with automated systems. Respectfully --- I don't know you, and this isn't a personal comment --- but my guess is that you distrust HFT because you've been told to distrust it. If you do even the most superficial cui bono analysis, you'll see the people most interested in making you believe that are themselves major financial institutions, all of them far larger than the HFTs. It wasn't HFTs that brought down the economy in '07-'08. It was their adversaries.

patio11 10y ago
The only disagreement I have with Thomas here is the last line. Securitization groups at the large banks and HFTs aren't adversaries -- they don't interact in any meaningful fashion. Large banks, taken as a whole, have some groups which are in competition with HFTs but have other groups which are their happy customers. (If you're a large bank, and you're taking liquidity, you are either astoundingly bad at your job or you actually desire to be buying what HFTs are selling.) The industry standard for buying/selling mortgage-backed securities or collateralized debt obligations isn't HFT. It isn't even automated. It is one sweating jock yelling at another sweating jock over a recorded telephone call. You can see this dramatized in The Big Short, where to unwind the shorts that the "good guys" have made they have to get their own not-quite-sweating not-quite-jock played-by-Brad-Pitt to do the phone calls on their behalf.
- kchoudhu 10y ago
  > It isn't even automated. Yes. No. Maybe. There's a massive push towards exchange trading the more liquid products: traders are expensive, and if you can get a robot to do basic inventory management and market making for you (even with a human in the loop), that's savings for a desk manager looking to cut costs in a highly straightened FI environment. The highly distressed and/or exotic stuff that people are talking about in the Big Short are still slung by salespeople, with the connivance/approval of traders.

deleted 10y ago

[deleted]