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Umm, yes and no. Example, I'm Fidelity Bob Fund Manager; after extensive research, I decide to make a decision to buy 200,000 shares of AAPL. So I enter my buy

Umm, yes and no. Example, I'm Fidelity Bob Fund Manager; after extensive research, I decide to make a decision to buy 200,000 shares of AAPL. So I enter my buy order into my OMS screen, which slices and dices these 200,000 shares into blocks of 100 shares (as for traders not to front-run me, because a naked buy order of 200,000 shares will drive the price up and I'll overpay long after my transaction is completed). HFT program meanwhile is actively scanning the quote book on all market centers for patterns of such a huge "whale order". Bob Fund may leave discriminating traces of evidence, such as executing the same blocks of buy order under my unique MPID multiple times. Or the HFT program is hooked up to a dark pool where it's constantly sending out small sell orders for 1 share to try to sniff out and match Bob Fund's huge buy order. Or it just might be that the HFT program has reverse-engineered the Bob Fund's VWAP algorithm for slicing/dicing orders and can detect how the orders are being sliced/diced under any given market conditions. Once the HFT algorithm is certain of a "whale order." It'll actively go out to every single market center, buy up all of the remaining AAPL liquidity on those markets and then present it to Bob Fund (voila! I'm providing you with liquidity at artificially inflated price!). Mr.Bob has no choice but to buy AAPL at a maybe a penny or two higher than what he could have paid for without HFT. The flip-side of the argument for HFT traders are that perhaps, they are better dealers than traditional dealers. For all we know, there might not be any interested retail investors who are willing to trade with Bob Fund; so Mr.Bob ends up trading with traditional dealers which have traditionally higher spread on the price of their stock, as they take on more risk as a dealer because they don't have the same execution speed and high-turnover rate as a HFT dealer. Also, HFT increases nominally execution speed and brings all market center's prices in line, as if there is a NBBO on ARCA and Bob Fund's order is on BATS, HFT will essentially act as the middle-man to match the true best bid and offer together, in the quickest time. However, the other counter argument against HFT is that it actually doesn't really provide liquidity to the market, as evident by the June flash-crash. During a situation such as this, broker-dealers are suppose to step during irrational exuberance and depression and trade with irrational investors and put a stop to the crash/rise. But HFT dealers stopped trading that day, triggering a lot of people's stop-market orders and hence we saw ridiculous sell orders of Accenture at $0.01. So I'd say, HFT is a mix-bag.

yummyfajitas 16y ago
There are two sides to every trade. The sophisticated Bob fund is trying to fool the markets into thinking that demand for AAPL has not increased. I.e., Bob is trying to keep inside information hidden and trade in such a way that he captures all the profits from this information himself. A predatory trader (algorithm or human) will bid up the prices, thereby capturing part of the gains of trade for themselves and part of it for the other market participants. So basically, while Bob pays more, the retail investor Bob is buying from receives more (and of course, the predator takes a cut).
- noname123 16y ago
  Ah, but your point is more philosophical than technical. Who should SEC and public interests side with? Bob, the retail investors Bob trades with, or the HFT/professional broker-dealers that Bob trade with? Bob would argue that public interests should ultimately place the highest priority with him, as he represents the "pension fund and 401(k) accounts of the hard working American public." (Never mind the fund fees, soft dollars & insider trading) The retail investors argue that public interests should ultimately rest with them. What how do you define retail investors? The long-term investors that trade blue chips and the day-traders with IB accounts? How are the day-traders with IB accounts different from professional broker-dealer except that they are typically less sophisticated but both out for blood? Should you really let the inmates run the asylums. The broker-dealers argue that public interests should side with them. Because they are the psychiatrists of the asylum that could orderly organize the inmates, make that the mental hospital is well-run and efficient place. But can you trust people when they have so much more leverage and power at a place? And but if you do away with them, wouldn't mental asylum collapse?
Nwallins 16y ago
> However, the other counter argument against HFT is that it actually doesn't really provide liquidity to the market, as evident by the June flash-crash. As far as I can tell, this is the only argument presented against HFT. > But HFT dealers stopped trading that day, triggering a lot of people's stop-market orders Are there other factors involved in this outcome, or is this a canonical HFT failure?

yummyfajitas 16y ago

There are two sides to every trade. The sophisticated Bob fund is trying to fool the markets into thinking that demand for AAPL has not increased. I.e., Bob is trying to keep inside information hidden and trade in such a way that he captures all the profits from this information himself. A predatory trader (algorithm or human) will bid up the prices, thereby capturing part of the gains of trade for themselves and part of it for the other market participants. So basically, while Bob pays more, the retail investor Bob is buying from receives more (and of course, the predator takes a cut).

noname123 16y ago
Ah, but your point is more philosophical than technical. Who should SEC and public interests side with? Bob, the retail investors Bob trades with, or the HFT/professional broker-dealers that Bob trade with? Bob would argue that public interests should ultimately place the highest priority with him, as he represents the "pension fund and 401(k) accounts of the hard working American public." (Never mind the fund fees, soft dollars & insider trading) The retail investors argue that public interests should ultimately rest with them. What how do you define retail investors? The long-term investors that trade blue chips and the day-traders with IB accounts? How are the day-traders with IB accounts different from professional broker-dealer except that they are typically less sophisticated but both out for blood? Should you really let the inmates run the asylums. The broker-dealers argue that public interests should side with them. Because they are the psychiatrists of the asylum that could orderly organize the inmates, make that the mental hospital is well-run and efficient place. But can you trust people when they have so much more leverage and power at a place? And but if you do away with them, wouldn't mental asylum collapse?

Nwallins 16y ago

> However, the other counter argument against HFT is that it actually doesn't really provide liquidity to the market, as evident by the June flash-crash. As far as I can tell, this is the only argument presented against HFT. > But HFT dealers stopped trading that day, triggering a lot of people's stop-market orders Are there other factors involved in this outcome, or is this a canonical HFT failure?