5 ms·

Beyond the "providing liquidity" argument, another side effect of HFT and arbitrage strategies that one might see as valuable is the promotion of global invaria

by vzcx 9y ago

Beyond the "providing liquidity" argument, another side effect of HFT and arbitrage strategies that one might see as valuable is the promotion of global invariants across the financial network, which is rather complicated distributed system. Would it make sense if there were two very different prices for something at two nearly identical venues? If large block of a stock is dropped on one exchange, would it make sense if there were no effects on the price of the same name on adjacent exchanges? All that aside, I think I have some larger questions about your worldview: What does it mean to "create value?" By what standards is value assessed? In the absence of any direct harm to another, under what circumstances should someone be deterred from engaging in profitable activity? Is the assumption that profits accrue to those who provide value to others utterly false, or just false in this (and possibly other, isolated) case? If merely the latter, why in this case?

the_cat_kittles 9y ago
>> Beyond the "providing liquidity" argument, another side effect of HFT and arbitrage strategies that one might see as valuable is the promotion of global invariants across the financial network, which is rather complicated distributed system. Would it make sense if there were two very different prices for something at two nearly identical venues? If large block of a stock is dropped on one exchange, would it make sense if there were no effects on the price of the same name on adjacent exchanges? i dont disagree with arbitrage and liquidity, and a globally invariant price for goods. i just think HFT isnt really improving that in a meaningful way. i ask you- at what timescale does it stop mattering? thats really what im saying. not that liquidity and invariant prices are suspect, but that things are happening on such a minute time scale that it doesn't matter. hey, i could be wrong, but no one has argued why going from milliseconds to picoseconds is improving our lives. thats the thing i would like explained. >> What does it mean to "create value?" By what standards is value assessed? tough to pin down, but surely its more than how much money it makes you... right? of course it varies from person to person. but i think its very lazy to say that its "whatever someone will pay for it". then value changes when laws change. i think most people probably agree that some things that are able to be sold for alot are not a value to society. i think its fair to say that there are some basically invariant things that are valuable. >> In the absence of any direct harm to another, under what circumstances should someone be deterred from engaging in profitable activity probably shouldn't be deterred. my point was that it looks like this is more like a game people are playing, with no real positive externalities. didn't say it was bad prima facie. i think its weird that people are very strongly clinging to the idea that it has some wonderful benefit to society. seems like a pretty weak argument, and kind of pathetic. its ok to to just admit its a game, and its for the players. poker players dont go around claiming they are providing everyone a service. i just get the sense there is an ingrained idea in our culture that there is some nobility in "finance" that i dont think belongs there in some cases. >> Is the assumption that profits accrue to those who provide value to others utterly false, or just false in this (and possibly other, isolated) case? If merely the latter, why in this case? not utterly false, but far from universally true. very difficult, broad topic that i am, or course, not in a position to say definitively. we can all point to cases where almost everyone agrees that someone gets overpaid, or underpaid. seems like a lot of people readily accept the dual premises that success == making money, and that money is a proxy for value. i take issue with both- i think its important to think about success and value more fundamentally. it seems like a lot of people have a tautological idea that you are paid what you deserve because its what you got paid...
- pdovy 9y ago
  >> i dont disagree with arbitrage and liquidity, and a globally invariant price for goods. i just think HFT isnt really improving that in a meaningful way. i ask you- at what timescale does it stop mattering? thats really what im saying. not that liquidity and invariant prices are suspect, but that things are happening on such a minute time scale that it doesn't matter. hey, i could be wrong, but no one has argued why going from milliseconds to picoseconds is improving our lives. thats the thing i would like explained. This is a little more complicated than it would initially appear, I'll try to explain from a market makers perspective why the speed race exists and why being faster (as a liquidity provider) is better for the market, at least the way it's currently structured. Market making 101 is basically that you want to come up with a fair value for the product you're trading, and then put out orders to buy for a little less than FV, and sell for a little more than FV. If you buy and sell at those prices you're providing liquidity to the market and capturing a small spread for your effort, great. Do that repeatedly and you have a business. But how much should your "a little less" and "a little more" than FV actually be? The smaller the better for the market, and this ideally should be the primary vector on which market makers compete with one another. Okay, so in our optimal scenario you'd always quote as tight as possible (limited by the granularity of pricing on the exchange) around the fair value. (I'm glossing over a lot here, calculating the fair value is non-trivial and your level of uncertainty about it will also determine the spread you can quote, but ignoring that for the moment). The problem with this is that if the fair value moves then some of your orders become mispriced, as they represent an opportunity to buy below or sell above fair value and if they execute will be a loser. Smart participants will recognize this and race to pick those off before you can reprice them. If this happens too often, you're not making money anymore, crap. Really only two options here, #1 is to widen your quote so that you are less sensitive to such movements and you are capturing a fatter average spread which compensates you for the losing trades. #2 is to get faster than those other guys. #2 yields a better outcome for the market, but necessitates a speed race as an additional vector of competition. Exchanges recognize this as well and have long played around with various schemes to give liquidity providers a systematic advantage, e.g., via rebates, or otherwise. It's a tough problem.

by vzcx 9y ago

the_cat_kittles 9y ago

>> Beyond the "providing liquidity" argument, another side effect of HFT and arbitrage strategies that one might see as valuable is the promotion of global invariants across the financial network, which is rather complicated distributed system. Would it make sense if there were two very different prices for something at two nearly identical venues? If large block of a stock is dropped on one exchange, would it make sense if there were no effects on the price of the same name on adjacent exchanges? i dont disagree with arbitrage and liquidity, and a globally invariant price for goods. i just think HFT isnt really improving that in a meaningful way. i ask you- at what timescale does it stop mattering? thats really what im saying. not that liquidity and invariant prices are suspect, but that things are happening on such a minute time scale that it doesn't matter. hey, i could be wrong, but no one has argued why going from milliseconds to picoseconds is improving our lives. thats the thing i would like explained. >> What does it mean to "create value?" By what standards is value assessed? tough to pin down, but surely its more than how much money it makes you... right? of course it varies from person to person. but i think its very lazy to say that its "whatever someone will pay for it". then value changes when laws change. i think most people probably agree that some things that are able to be sold for alot are not a value to society. i think its fair to say that there are some basically invariant things that are valuable. >> In the absence of any direct harm to another, under what circumstances should someone be deterred from engaging in profitable activity probably shouldn't be deterred. my point was that it looks like this is more like a game people are playing, with no real positive externalities. didn't say it was bad prima facie. i think its weird that people are very strongly clinging to the idea that it has some wonderful benefit to society. seems like a pretty weak argument, and kind of pathetic. its ok to to just admit its a game, and its for the players. poker players dont go around claiming they are providing everyone a service. i just get the sense there is an ingrained idea in our culture that there is some nobility in "finance" that i dont think belongs there in some cases. >> Is the assumption that profits accrue to those who provide value to others utterly false, or just false in this (and possibly other, isolated) case? If merely the latter, why in this case? not utterly false, but far from universally true. very difficult, broad topic that i am, or course, not in a position to say definitively. we can all point to cases where almost everyone agrees that someone gets overpaid, or underpaid. seems like a lot of people readily accept the dual premises that success == making money, and that money is a proxy for value. i take issue with both- i think its important to think about success and value more fundamentally. it seems like a lot of people have a tautological idea that you are paid what you deserve because its what you got paid...

pdovy 9y ago
>> i dont disagree with arbitrage and liquidity, and a globally invariant price for goods. i just think HFT isnt really improving that in a meaningful way. i ask you- at what timescale does it stop mattering? thats really what im saying. not that liquidity and invariant prices are suspect, but that things are happening on such a minute time scale that it doesn't matter. hey, i could be wrong, but no one has argued why going from milliseconds to picoseconds is improving our lives. thats the thing i would like explained. This is a little more complicated than it would initially appear, I'll try to explain from a market makers perspective why the speed race exists and why being faster (as a liquidity provider) is better for the market, at least the way it's currently structured. Market making 101 is basically that you want to come up with a fair value for the product you're trading, and then put out orders to buy for a little less than FV, and sell for a little more than FV. If you buy and sell at those prices you're providing liquidity to the market and capturing a small spread for your effort, great. Do that repeatedly and you have a business. But how much should your "a little less" and "a little more" than FV actually be? The smaller the better for the market, and this ideally should be the primary vector on which market makers compete with one another. Okay, so in our optimal scenario you'd always quote as tight as possible (limited by the granularity of pricing on the exchange) around the fair value. (I'm glossing over a lot here, calculating the fair value is non-trivial and your level of uncertainty about it will also determine the spread you can quote, but ignoring that for the moment). The problem with this is that if the fair value moves then some of your orders become mispriced, as they represent an opportunity to buy below or sell above fair value and if they execute will be a loser. Smart participants will recognize this and race to pick those off before you can reprice them. If this happens too often, you're not making money anymore, crap. Really only two options here, #1 is to widen your quote so that you are less sensitive to such movements and you are capturing a fatter average spread which compensates you for the losing trades. #2 is to get faster than those other guys. #2 yields a better outcome for the market, but necessitates a speed race as an additional vector of competition. Exchanges recognize this as well and have long played around with various schemes to give liquidity providers a systematic advantage, e.g., via rebates, or otherwise. It's a tough problem.