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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 yo

by 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

by airza 9y ago

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