4 ms·

People who are pro-HFT see it as a way of increasing the 'liquidity' of the market. In their eyes it makes it easier to move volume of stock, and moves the bid

by sfeng 9y ago

People who are pro-HFT see it as a way of increasing the 'liquidity' of the market. In their eyes it makes it easier to move volume of stock, and moves the bid price of the stock closer to the ask price of the stock.

jandrese 9y ago
That argument still makes no sense to me. How does skimming off of the top of trades make the market more liquid? It's not like they're offering any new product for sale. If a market is moving slowly all they do is artificially inflate the number of transactions without increasing liquidity. HFT is just abusing an information advantage to skim off of the market. Because they have a slightly more accurate view of the market, they can front run trades and make money. That's all it is. There is no benefit to the seller, to the buyer, or to the market. It's pure parasitism.
- airza 9y ago
  before HFT these transactions were run by human market makers from giant banks who skimmed hundreds of times more profit off of them (this is the reason that you hear about it in the news all of the time) Someone's job is going to be to sit between the people who just want to sell and those who want to buy- when we talk about liquidity it's just this. The fact that you're directing your anger towards some robots who are ruthlessly driving each other to the minimum possible gap between the buy price and the sell price on this is bizarre
  - vostok 9y ago
    I have a pet theory that anti-HFT sentiment is stoked by banks and other entities that aren't able to compete.
    - SimbaOnSteroids 9y ago
      Unless you're a bank or have similar means you can't compete.
      - vostok 9y ago
        I'm not sure I understand the argument. The publicly traded top trading firms are much smaller than the banks. They're in the $1-2 billion range. Of course you need money to compete. You need money to compete with Facebook too.
    - anigbrowl 9y ago
      Heaven forfend that people should form their own opinions on first principles, even though those opinions might be mistaken.
  - lobster_johnson 9y ago
    Does HFT only hurt "other bots"? My understanding was that HFT could take advantage of faster feeds to front-run human traders.
    - jandrese 9y ago
      It hurts anybody who sells a stock. You sell a stock at a certain price, someone else looks up the price of the stock and sees that it is slightly higher than what you listed, because your information is still propagating through the network. That person offers to buy the stock at the higher price. The market matches your offers up. Then the HFT steps in and buys your stock and resells it to the buyer at the price he asked. There is no value to the seller or buyer. Zero risk to the HFT firm. No improvement in market conditions--the HFT firm doesn't sit on positions, they can't increase liquidty. Just free money from abusing a latency advantage on their view of the market.
      - maxerickson 9y ago
        Something is providing the liquidity that has brought spreads down over the last couple of decades.
        jandrese 9y ago
        Computerized trading. Sellers basically publish their positions on a server and buyers query for the best price on a stock and the place the order. None of this requires or benefits from HFT.
      - MichaelGG 9y ago
        Can you explain this in terms of actual orders placed? How do you "sell at a certain price"?
      - davidmr 9y ago
        Respectfully, this is just plain incorrect. You're describing some situations that do happen and just choosing to ignore what happens the rest of the time. When demand precisely matches supply, you're correct--you need a matching engine to connect buyer and seller and no middle man/market maker need get between them. That also happens too. Assuming that at some point bids and asks will line up and trades will happen doesn't a market make; that's the exchange's job. Making a market means being able to quote prices on both sides of the book and having inventory to trade at the current market price. Carrying that inventory has actual risk involved, and that's why it's not a free service that the exchange (or anyone else) provides. Market makers also get penalized by the exchanges if they're not making markets for some large percentage of the time that the products are trading. Maybe a better way to look at it is that the exchange is there to match up buyers and sellers at the current price at a given moment in time. The market matches up buyers and sellers at the current price over a period of time. This market stabilizes the price over time. Demand and supply just don't line up perfectly like it seems like they should. That's the difference between the market and the exchange. If I'm buying a product now, I want an idea of the true value of it, and the less the price is whipping around waiting for demand to match the supply, the more I know what the current market rate is. I'm not saying they're doing gods work, but to say that there's no risk involved or reason for them to exist is incorrect. If you don't buy any of the above arguments, then I'm interested in your answer to the question of why the exchanges themselves pay market makers to make markets. If the current technology renders market makers obsolete, surely the exchanges would recognize that and keep the money for themselves, no?
  - infecto 9y ago
    Thank you. I always have a hard time getting this message across.
  - jandrese 9y ago
    HFT aren't the firms putting the markets on computers. HFTs sit between the computers and the retail traders and use that information advantage to front run. There's no reason there needs to be a middleman here. Buyers can buy from sellers directly. In fact that's what they think they are doing, except that the HFT firms are basically adjusting the price on them underneath the sheets. The real losers are the sellers. They put up some product at a price, someone else on the other side of town sees a slightly different price because the market only moves at the speed of light. Instead of the seller getting a little bonus, that bonus is hoovered up by the HFT guy in the middle who has a more accurate view of the market. What service did the HFT provide? Where did this mysterious liquidity come from? In the old days the middlemen were responsible for actually finding the guy making the sale and matching him up with the buyer. This was real work and it makes sense that people would be paid for it. Now the computer does it for you, there is no need for a middleman and no value he can offer. It's a parasitic relationship.
    - maxerickson 9y ago
      Traditionally market makers do more than match orders from other parties: https://en.wikipedia.org/wiki/Market_maker https://en.wikipedia.org/wiki/Market_maker This is because sellers don't always want to wait around for buyers and vice versa. Sellers that are worried they have poor market visibility can just put in a limit order that they believe represents a fair price.
    - jasonmunro 9y ago
      The liquidity comes from the HFT market maker's own money. Market makers are required to post bid and offers of a reasonable level of liquidity in all symbols they are registered to "make markets" in. It may seem like a simple skim off the top operation, but it's not that simple. If they do not maintain their bids/offers, they are disqualified from market making. If they do maintain them, they reap a number of benefits including discounted pricing from trading platforms and IIRC, the ability to do naked short selling (which IMO should be off-limits for all trading firms). I'm not defending HFT here, just stating a fact that market makers are a part of the trading ecosystem. Keep in mind that "making" and "taking" liquidity is not the same thing as buying and selling. Market makers are required to post both bids and offers. The difference is that market makers put their orders (buy or sell) on the "book", which means they are offering liquidity in both directions. The order that comes in to match (think "market" order to buy or sell) is the "taker". Firms that supply liquidity are rewarded by trading platforms (unsurprisingly, since those firms "make" their market), and firms that match those orders (takers), are charged for the service. Not all HFT outfits are "market makers", but many are. I can't say specifically if Virtu is a market maker, even if I remembered :) The point is that liquidity providers don't pay for their trades, they are paid for them, so it's a natural fit for a smart HFT operation.
  - lotsoflumens 9y ago
    No, the idea the HFTs reduce spreads is false. See the research done by Nanex: http://www.nanex.net/aqck2/4594.html http://www.nanex.net/aqck2/4594.html
- SEJeff 9y ago
  aka pure capitalism, which is very darwinistic, by design.
- robrenaud 9y ago
  The CEO of Vanguard likes HFTs. http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-frequency-trading-firms.html http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f... "We actually have a really good perspective on this, and there's no question in our mind that the cost to investors through funds has come down," he said.
- marcosdumay 9y ago
  I can't help but to think the problem is being intentionally framed in an unhelpful way. The problem is their ability to front-run people. They shouldn't be able to get a more accurate view of the market than anybody else, and they certainly shouldn't have the chance to roll-back their actions after they get a glance of the results. Frequency of trading is irrelevant.
  - MichaelGG 9y ago
    If an HFT firm was "front running" as you put it, and you know about it, why doesn't the SEC? Front running is not legal. Or are you using the Flash Boys definition of front run which is "anyone that trades better than me" or "anytime I try to buy 50,000 shares but move the price"?
    - anigbrowl 9y ago
      The SEC doesn't have infinite resources, but has to enforce somewhat selectively. It's possible that they disapprove of some kinds of HFT activities but doubt their own ability to persuade a jury sufficiently well to justify the cost of prosecution. I don't mean this as a comment on HFT or the law, I really don't know. I'm just pointing out that the SEC is bound by budgetary constraints and that litigation is very expensive, so they have to do cost/benefit analysis and prioritize the cases that are more likely to win. And this is before political considerations come into the picture. News articles described the 'resident's SEC pick as being more interested in capital formation than enforcement; that seems a pretty reasonable assessment to me, given that S&C was representing Goldman Sachs during the epic CDO litigation, the cabinet is stuffed with GS alumni, and the administration's general attitude seems to be less regulation for more muscular and dynamic capitalism. http://www.reuters.com/article/us-usa-trump-sec-idUSKBN14N1Y9 http://www.reuters.com/article/us-usa-trump-sec-idUSKBN14N1Y...
  - jasonmunro 9y ago
    Firms with enough money to spend _can_ get a more accurate view of the market. The issue is proprietary data feeds. A trading platform is required to disseminate information to the consolidated tape at the same rate they do for a private feed, but that only holds for the "walls" of the trading platforms network. The consolidated tape is a LOT slower than a 100MB multicast feed being slurped up by a co-located server sitting 20 feet from the trading system.
- defgeneric 9y ago
  There's just a huge number of securities you can trade now. Most equities have monthly options (so e.g. about ~50 calls & puts * 6 months) and the indices have weekly now. And those are just the basic derivatives, the OTC stuff gets even crazier.

by sfeng 9y ago

jandrese 9y ago

That argument still makes no sense to me. How does skimming off of the top of trades make the market more liquid? It's not like they're offering any new product for sale. If a market is moving slowly all they do is artificially inflate the number of transactions without increasing liquidity. HFT is just abusing an information advantage to skim off of the market. Because they have a slightly more accurate view of the market, they can front run trades and make money. That's all it is. There is no benefit to the seller, to the buyer, or to the market. It's pure parasitism.

airza 9y ago
before HFT these transactions were run by human market makers from giant banks who skimmed hundreds of times more profit off of them (this is the reason that you hear about it in the news all of the time) Someone's job is going to be to sit between the people who just want to sell and those who want to buy- when we talk about liquidity it's just this. The fact that you're directing your anger towards some robots who are ruthlessly driving each other to the minimum possible gap between the buy price and the sell price on this is bizarre
- vostok 9y ago
  I have a pet theory that anti-HFT sentiment is stoked by banks and other entities that aren't able to compete.
  - SimbaOnSteroids 9y ago
    Unless you're a bank or have similar means you can't compete.
    - vostok 9y ago
      I'm not sure I understand the argument. The publicly traded top trading firms are much smaller than the banks. They're in the $1-2 billion range. Of course you need money to compete. You need money to compete with Facebook too.
  - anigbrowl 9y ago
    Heaven forfend that people should form their own opinions on first principles, even though those opinions might be mistaken.
- lobster_johnson 9y ago
  Does HFT only hurt "other bots"? My understanding was that HFT could take advantage of faster feeds to front-run human traders.
  - jandrese 9y ago
    It hurts anybody who sells a stock. You sell a stock at a certain price, someone else looks up the price of the stock and sees that it is slightly higher than what you listed, because your information is still propagating through the network. That person offers to buy the stock at the higher price. The market matches your offers up. Then the HFT steps in and buys your stock and resells it to the buyer at the price he asked. There is no value to the seller or buyer. Zero risk to the HFT firm. No improvement in market conditions--the HFT firm doesn't sit on positions, they can't increase liquidty. Just free money from abusing a latency advantage on their view of the market.
    - maxerickson 9y ago
      Something is providing the liquidity that has brought spreads down over the last couple of decades.
      - jandrese 9y ago
        Computerized trading. Sellers basically publish their positions on a server and buyers query for the best price on a stock and the place the order. None of this requires or benefits from HFT.
    - MichaelGG 9y ago
      Can you explain this in terms of actual orders placed? How do you "sell at a certain price"?
    - davidmr 9y ago
      Respectfully, this is just plain incorrect. You're describing some situations that do happen and just choosing to ignore what happens the rest of the time. When demand precisely matches supply, you're correct--you need a matching engine to connect buyer and seller and no middle man/market maker need get between them. That also happens too. Assuming that at some point bids and asks will line up and trades will happen doesn't a market make; that's the exchange's job. Making a market means being able to quote prices on both sides of the book and having inventory to trade at the current market price. Carrying that inventory has actual risk involved, and that's why it's not a free service that the exchange (or anyone else) provides. Market makers also get penalized by the exchanges if they're not making markets for some large percentage of the time that the products are trading. Maybe a better way to look at it is that the exchange is there to match up buyers and sellers at the current price at a given moment in time. The market matches up buyers and sellers at the current price over a period of time. This market stabilizes the price over time. Demand and supply just don't line up perfectly like it seems like they should. That's the difference between the market and the exchange. If I'm buying a product now, I want an idea of the true value of it, and the less the price is whipping around waiting for demand to match the supply, the more I know what the current market rate is. I'm not saying they're doing gods work, but to say that there's no risk involved or reason for them to exist is incorrect. If you don't buy any of the above arguments, then I'm interested in your answer to the question of why the exchanges themselves pay market makers to make markets. If the current technology renders market makers obsolete, surely the exchanges would recognize that and keep the money for themselves, no?
- infecto 9y ago
  Thank you. I always have a hard time getting this message across.
- jandrese 9y ago
  HFT aren't the firms putting the markets on computers. HFTs sit between the computers and the retail traders and use that information advantage to front run. There's no reason there needs to be a middleman here. Buyers can buy from sellers directly. In fact that's what they think they are doing, except that the HFT firms are basically adjusting the price on them underneath the sheets. The real losers are the sellers. They put up some product at a price, someone else on the other side of town sees a slightly different price because the market only moves at the speed of light. Instead of the seller getting a little bonus, that bonus is hoovered up by the HFT guy in the middle who has a more accurate view of the market. What service did the HFT provide? Where did this mysterious liquidity come from? In the old days the middlemen were responsible for actually finding the guy making the sale and matching him up with the buyer. This was real work and it makes sense that people would be paid for it. Now the computer does it for you, there is no need for a middleman and no value he can offer. It's a parasitic relationship.
  - maxerickson 9y ago
    Traditionally market makers do more than match orders from other parties: https://en.wikipedia.org/wiki/Market_maker https://en.wikipedia.org/wiki/Market_maker This is because sellers don't always want to wait around for buyers and vice versa. Sellers that are worried they have poor market visibility can just put in a limit order that they believe represents a fair price.
  - jasonmunro 9y ago
    The liquidity comes from the HFT market maker's own money. Market makers are required to post bid and offers of a reasonable level of liquidity in all symbols they are registered to "make markets" in. It may seem like a simple skim off the top operation, but it's not that simple. If they do not maintain their bids/offers, they are disqualified from market making. If they do maintain them, they reap a number of benefits including discounted pricing from trading platforms and IIRC, the ability to do naked short selling (which IMO should be off-limits for all trading firms). I'm not defending HFT here, just stating a fact that market makers are a part of the trading ecosystem. Keep in mind that "making" and "taking" liquidity is not the same thing as buying and selling. Market makers are required to post both bids and offers. The difference is that market makers put their orders (buy or sell) on the "book", which means they are offering liquidity in both directions. The order that comes in to match (think "market" order to buy or sell) is the "taker". Firms that supply liquidity are rewarded by trading platforms (unsurprisingly, since those firms "make" their market), and firms that match those orders (takers), are charged for the service. Not all HFT outfits are "market makers", but many are. I can't say specifically if Virtu is a market maker, even if I remembered :) The point is that liquidity providers don't pay for their trades, they are paid for them, so it's a natural fit for a smart HFT operation.
- lotsoflumens 9y ago
  No, the idea the HFTs reduce spreads is false. See the research done by Nanex: http://www.nanex.net/aqck2/4594.html http://www.nanex.net/aqck2/4594.html
SEJeff 9y ago
aka pure capitalism, which is very darwinistic, by design.
robrenaud 9y ago
The CEO of Vanguard likes HFTs. http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-frequency-trading-firms.html http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f... "We actually have a really good perspective on this, and there's no question in our mind that the cost to investors through funds has come down," he said.
marcosdumay 9y ago
I can't help but to think the problem is being intentionally framed in an unhelpful way. The problem is their ability to front-run people. They shouldn't be able to get a more accurate view of the market than anybody else, and they certainly shouldn't have the chance to roll-back their actions after they get a glance of the results. Frequency of trading is irrelevant.
- MichaelGG 9y ago
  If an HFT firm was "front running" as you put it, and you know about it, why doesn't the SEC? Front running is not legal. Or are you using the Flash Boys definition of front run which is "anyone that trades better than me" or "anytime I try to buy 50,000 shares but move the price"?
  - anigbrowl 9y ago
    The SEC doesn't have infinite resources, but has to enforce somewhat selectively. It's possible that they disapprove of some kinds of HFT activities but doubt their own ability to persuade a jury sufficiently well to justify the cost of prosecution. I don't mean this as a comment on HFT or the law, I really don't know. I'm just pointing out that the SEC is bound by budgetary constraints and that litigation is very expensive, so they have to do cost/benefit analysis and prioritize the cases that are more likely to win. And this is before political considerations come into the picture. News articles described the 'resident's SEC pick as being more interested in capital formation than enforcement; that seems a pretty reasonable assessment to me, given that S&C was representing Goldman Sachs during the epic CDO litigation, the cabinet is stuffed with GS alumni, and the administration's general attitude seems to be less regulation for more muscular and dynamic capitalism. http://www.reuters.com/article/us-usa-trump-sec-idUSKBN14N1Y9 http://www.reuters.com/article/us-usa-trump-sec-idUSKBN14N1Y...
- jasonmunro 9y ago
  Firms with enough money to spend _can_ get a more accurate view of the market. The issue is proprietary data feeds. A trading platform is required to disseminate information to the consolidated tape at the same rate they do for a private feed, but that only holds for the "walls" of the trading platforms network. The consolidated tape is a LOT slower than a 100MB multicast feed being slurped up by a co-located server sitting 20 feet from the trading system.
defgeneric 9y ago
There's just a huge number of securities you can trade now. Most equities have monthly options (so e.g. about ~50 calls & puts * 6 months) and the indices have weekly now. And those are just the basic derivatives, the OTC stuff gets even crazier.