3 ms·

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?
  - jasonmunro 9y ago
    No exchange operator is doing "gods work" :) Seriously though, you are correct. Market makers are an integral part of how the markets function. Do they skim money from trades because they are better equipped to read the market at a given point in time? Absolutely. Do they also provide liquidity for the retail trader in a given moment to buy/sell shares? They definitely do. Market makers are not a new facet of trading systems, they are just a natural fit for HFT firms. Would it be better for your order of X shares of N company to go unfilled, or to pay .01 cents more per share to have it executed when you want?
  - jandrese 9y ago
    Market making and HFT are different services, they may be done by the same company, but you don't need sub-ms views of the market if you are actually holding positions. This is why HFT firms end every day with empty books.
maxerickson 9y ago
Literal front running is illegal. The thing to accuse them of is book stuffing.
- jandrese 9y ago
  You are right, the Wall Strret banks are known for their rigid moral codes and absolute devotion to the law over the potential for free profits.

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?
- jasonmunro 9y ago
  No exchange operator is doing "gods work" :) Seriously though, you are correct. Market makers are an integral part of how the markets function. Do they skim money from trades because they are better equipped to read the market at a given point in time? Absolutely. Do they also provide liquidity for the retail trader in a given moment to buy/sell shares? They definitely do. Market makers are not a new facet of trading systems, they are just a natural fit for HFT firms. Would it be better for your order of X shares of N company to go unfilled, or to pay .01 cents more per share to have it executed when you want?
- jandrese 9y ago
  Market making and HFT are different services, they may be done by the same company, but you don't need sub-ms views of the market if you are actually holding positions. This is why HFT firms end every day with empty books.

maxerickson 9y ago

Literal front running is illegal. The thing to accuse them of is book stuffing.

jandrese 9y ago
You are right, the Wall Strret banks are known for their rigid moral codes and absolute devotion to the law over the potential for free profits.