4 ms·

I'm not an expert, but how does HFT increase liquidity? One definition of liquidity is when you can sell something without affecting the price much. Most peopl

by neilk 16y ago

I'm not an expert, but how does HFT increase liquidity? One definition of liquidity is when you can sell something without affecting the price much. Most people on Wall Street will tell you their job somehow increases liquidity -- connecting buyers and sellers in more and more efficient ways. HFT seems different. It is comparable to front-running other people's orders. Someone tries to buy an item for $1.00, and the HFT algorithm tries to grab the item first and resell it to our original buyer (and other people in the market) for just a tiny bit more. From my perspective it's effectively a sort of tax, like a bridge toll. It seems to me like this has to make every transaction affect the price more, not less. How does this increase efficiency or liquidity?

noname123 16y ago
You right. But I'll give you the counter-argument. In the stock market, just like the real estate/auto market, there are never just true buyers and sellers; there are also brokers and dealers who keep a inventory of goods, so that they can sell to non-discriminating retail customers who just want the goods right now. Their expertise and self-interests in turns, affects the price of the good in the whole entire market. The stock market once have had traditional broker-dealers that controlled the spread of a stock. That is, dealers are willing to buy stocks from impatient traders who are willing to sell at a market order at a price that is set by the dealer; the dealers then in turn, later sell their inventory at an artificially inflated price to impatient traders who are willing buy the stock at a market at the price named by the dealer. Traditional dealers, in order to tack on the risk of carrying their inventory of stocks (after all, a stock could theoretically drop to zero before they could sell the whole lot), keep the spread of the stock big (they are willing to buy low and sell high) at the expense of retail investors. HFT, due to their high-tech platform and high execution speed tightens this spread because they don't carry as high a risk of inventory; because their execution speed is in timescale of micro-seconds; so essentially, in the timeframe of seconds, they buy a position and then sell that position subsequently and not really carry that position through for the market to affect the value of that position. This in theory is good for retail investors as they actually end up paying less for their stocks. But with good technology, you could also use it for bad. With fast computers and sophisticated algorithms, HFT traders could learn how to game the traders and big funds that they are suppose to server - just like a regular car or real estate dealer. If you know where the consumer demand is, you could buy up all of the supply ahead of time and artificially inflate the price to make people pay more. If you know that your competitors are replicating your every move, you could deceive them by making a small trade against your true intention, have them jump on the bandwagon and swiftly punish them by executing your true big trade afterwords. The possibilities are endless.
robak 16y ago
yep. It's just GS tax on the public that bailed them out. As shallow as it sounds, it is a fact. Only in America!
yummyfajitas 16y ago
Someone tries to buy an item for $1.00, and the HFT algorithm tries to grab the item first and resell it to our original buyer (and other people in the market) for just a tiny bit more. No. The matching engine will match first the highest priced order, and in the case of orders at the same price, whichever order was placed first. You can't jump ahead in the queue, no matter how fast your algorithm is [1]. [1] This statement only applies to US equities/futures/derivatives markets. I think it might be possible in Canadian markets under some limited circumstances.
- deleted 16y ago
  [deleted]
- noname123 16y ago
  True for a small lot order for a retail investor. But for a large block order from a institutional investor that's been diced and prepared to be executed over a period of time, predatory HFT algo's could still anticipate you and buy up remaining liquidity and sell back to you at an artificially inflated price.
- anonymousDan 16y ago
  Can I ask you how this is physically laid out? Is there just a big centralized computer at the exchange with two input queues, one for buys and one for sells? What if I want to place an order at the best price across multiple different exchanges?
  - yummyfajitas 16y ago
    It's basically what you think; a computer system keeps a queue of buy and sell orders, sorted by price/time (i.e., best price wins, if prices is equal, earliest order wins). It then matches trades by popping the top of the queue. If you place an order on INET which can be filled at a better price on ARCA, then INET routes your order to ARCA and you are charged a small routing fee. This is required by RegNMS. (There is a "don't route me" flag if you don't want to be routed. In that case, your order will simply go unfilled - exchanges can't match you at a price worse than the best price available on all exchanges.)
cturner 16y ago
HFT seems different. It is comparable to front-running other people's orders I think you're confusing HFT (which is a broad term) with flash trading.
- yummyfajitas 16y ago
  Mechanics of flash trading: say the best ask price on INET is 100, the best ask price on ARCA is 99. If you place an order buy at 99 on INET, INET is legally obligated to route your order to ARCA (since ARCA has the NBBO). You will pay 99/share + commission + routing fee, with the fees paid to ARCA. If INET were to flash your order, they give some HFT firm the opportunity to sell you shares at 99. The HFT firm can accept or reject - if they accept, you pay 99/share + commission and INET gets the commission. That's a completely different game than front running. It has other issues, like being potentially unfair to ARCA and traders who can't afford flash orders, but it isn't front running.

by neilk 16y ago

noname123 16y ago

You right. But I'll give you the counter-argument. In the stock market, just like the real estate/auto market, there are never just true buyers and sellers; there are also brokers and dealers who keep a inventory of goods, so that they can sell to non-discriminating retail customers who just want the goods right now. Their expertise and self-interests in turns, affects the price of the good in the whole entire market. The stock market once have had traditional broker-dealers that controlled the spread of a stock. That is, dealers are willing to buy stocks from impatient traders who are willing to sell at a market order at a price that is set by the dealer; the dealers then in turn, later sell their inventory at an artificially inflated price to impatient traders who are willing buy the stock at a market at the price named by the dealer. Traditional dealers, in order to tack on the risk of carrying their inventory of stocks (after all, a stock could theoretically drop to zero before they could sell the whole lot), keep the spread of the stock big (they are willing to buy low and sell high) at the expense of retail investors. HFT, due to their high-tech platform and high execution speed tightens this spread because they don't carry as high a risk of inventory; because their execution speed is in timescale of micro-seconds; so essentially, in the timeframe of seconds, they buy a position and then sell that position subsequently and not really carry that position through for the market to affect the value of that position. This in theory is good for retail investors as they actually end up paying less for their stocks. But with good technology, you could also use it for bad. With fast computers and sophisticated algorithms, HFT traders could learn how to game the traders and big funds that they are suppose to server - just like a regular car or real estate dealer. If you know where the consumer demand is, you could buy up all of the supply ahead of time and artificially inflate the price to make people pay more. If you know that your competitors are replicating your every move, you could deceive them by making a small trade against your true intention, have them jump on the bandwagon and swiftly punish them by executing your true big trade afterwords. The possibilities are endless.

robak 16y ago

yep. It's just GS tax on the public that bailed them out. As shallow as it sounds, it is a fact. Only in America!

yummyfajitas 16y ago

Someone tries to buy an item for $1.00, and the HFT algorithm tries to grab the item first and resell it to our original buyer (and other people in the market) for just a tiny bit more. No. The matching engine will match first the highest priced order, and in the case of orders at the same price, whichever order was placed first. You can't jump ahead in the queue, no matter how fast your algorithm is [1]. [1] This statement only applies to US equities/futures/derivatives markets. I think it might be possible in Canadian markets under some limited circumstances.

deleted 16y ago
[deleted]
noname123 16y ago
True for a small lot order for a retail investor. But for a large block order from a institutional investor that's been diced and prepared to be executed over a period of time, predatory HFT algo's could still anticipate you and buy up remaining liquidity and sell back to you at an artificially inflated price.
anonymousDan 16y ago
Can I ask you how this is physically laid out? Is there just a big centralized computer at the exchange with two input queues, one for buys and one for sells? What if I want to place an order at the best price across multiple different exchanges?
- yummyfajitas 16y ago
  It's basically what you think; a computer system keeps a queue of buy and sell orders, sorted by price/time (i.e., best price wins, if prices is equal, earliest order wins). It then matches trades by popping the top of the queue. If you place an order on INET which can be filled at a better price on ARCA, then INET routes your order to ARCA and you are charged a small routing fee. This is required by RegNMS. (There is a "don't route me" flag if you don't want to be routed. In that case, your order will simply go unfilled - exchanges can't match you at a price worse than the best price available on all exchanges.)

cturner 16y ago

HFT seems different. It is comparable to front-running other people's orders I think you're confusing HFT (which is a broad term) with flash trading.

yummyfajitas 16y ago
Mechanics of flash trading: say the best ask price on INET is 100, the best ask price on ARCA is 99. If you place an order buy at 99 on INET, INET is legally obligated to route your order to ARCA (since ARCA has the NBBO). You will pay 99/share + commission + routing fee, with the fees paid to ARCA. If INET were to flash your order, they give some HFT firm the opportunity to sell you shares at 99. The HFT firm can accept or reject - if they accept, you pay 99/share + commission and INET gets the commission. That's a completely different game than front running. It has other issues, like being potentially unfair to ARCA and traders who can't afford flash orders, but it isn't front running.