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Many companies make a profit by doing something that benefits society in at least some way, society pays them for their service. E.g. selling electronics: the c

Many companies make a profit by doing something that benefits society in at least some way, society pays them for their service. E.g. selling electronics: the company makes a profit, but society benefits by being able to buy and use those electronics. What about quantitative trading firms. They make a profit themselves. But how do they benefit society?

bgitarts 9y ago
They would argue that they get paid to capture market inefficiencies and make the market efficient so goods, services and companies are properly priced.
- S3raph 9y ago
  and they improve liquidity (reduce bid/ask spread)
tomp 9y ago
You could say the same thing about most advertising companies (i.e. including Google, Facebook and most startups).
- Synaesthesia 9y ago
  People have a misconception of advertising as a noble or worthy, and necessary thing. In business school it’s taught that it’s purpose is to inform rational consumers about what to buy. Actually if you look at advertisements, you learn it’s purpose is to misinform irrational consumers into buying. Advertisements have learned to use emotional messages, sex, repetition and other irrational means to sell.
  - gaius 9y ago
    Quite. If a person needs a thing they will realise that themselves and go out and buy one. Advertising is 100% about things you don't need and have no real reason to purchase. https://genius.com/Bill-hicks-on-advertisers-and-marketing-annotated https://genius.com/Bill-hicks-on-advertisers-and-marketing-a...
simonh 9y ago
Many of these firms are market makers. That’s a role that has existed in markets well into the 19th century. Market makers are contractually obliged to offer a price for any security on their books. That means if you want to sell, you always can no matter what is happening in the market (unless it’s suspended). Nowadays all market makers (that I know of) trade algorithmically and given that volumes and speeds at which modern markets operate, it’s pretty much the only way they could without having to charge considerably higher market maker fees, increasing costs for everybody. Furthermore, if I want to sell a security and one of these companies puts in the best bid, then I just made more money than I otherwise would have if they weren’t there. Likewise if I was buying, they might offer me a lower price. Isn’t that a good thing? They are happy and the counterparty is happy. Then there’s arbitrage. If I am trading on an exchange, but there’s a better price on another axchange one of these firms trades on, they might offer me a better price than I otherwise get. Effectively I d get a price on the other market, without having the costs of trading on it. Again, that’s better for me, where ‘me’ might be your savings account or pension fund manager, or a manufacturer or producer on a commodities market. So these firms reduce costs for other participants on the market.
lordnacho 9y ago
Here's a very simple service that everyone would understand. Suppose you are a customer with a connection to an exchange. You can't afford to connect to every exchange, because that would cost you a small fortune. If you stick your order into this exchange, you might have to wait around for someone to meet your price. In fact, there might be someone willing to trade with you at your price, but you don't know it because you're on different exchanges. (Let's not get into NMS.) An HFT with a view of the whole market would help you distribute your order to all exchanges. They do this by leaning on your order while posting everywhere else. So if someone came in and met the HFT's order in some market, the HFT would turn around and fill you immediately for a small difference, and they'd pull all the other orders when this happened. That's a service, and you pay for it. A lot of HFT strategies provide a service similar to this in some way.
- dna_polymerase 9y ago
  Oh come on, if order books were generally accessible I could just see where stuff is traded right now and sell there by myself. It's just that market data for stocks is so heavily gated that HFT guys already have an edge by just buying data from all the excahnges for huge piles of cash. If this was such a great service why is IEX becoming so big? HFT is a nightmare from a CSR view. Those companies provide no real value to society (not by any standard) and even worse: By hiring all those talented young people with degrees in various fields they actually hurt society. Give those people real problems to work on, instead of wasting them on optimizing those HFT systems.
  - kasey_junk 9y ago
    IEX allows and has major liquidity providing HFT firms & probably couldn’t operate without them. Also IEX is a very small exchange, not one getting huge. Their PR firm is impressive not their size. Finally there are lots of trading options that allow you multi-exchange order book access. Getting market access is fairly cheap. The expensive part is the counter party risk mitigation. You need someone to prove you are good for the trades you say you are. That has nothing to do with HFT or electronic trading at all.
  - 9y ago
dsacco 9y ago
To put it succinctly: 1. All trading strategies profit by identifying market inefficiencies. 2. Market inefficiencies occur (in general) when the price of a security is inaccurate. 3. By correcting the inefficiency, the strategy profits consistently until there is no longer a counterparty willing to take the trade at that (inefficient) price. This process is broadly called price discovery.
ppod 9y ago
If there is money to be made, it means that some companies or products were not priced correctly. This means that someone is getting overpaid and someone underpaid relative to their value. Traders find the fairest price for a product, just like a trader in a traditional physical marketplace.
Synaesthesia 9y ago
It doesn't, it benefits a small amount of people, with no benefit, or probably a detriment to society at large.
kelvin0 9y ago
Glad this question came up, because I am always wondering the same. I also was approached several times to work in HFT as a software dev by some of the big firms. My subjective moral compass just seems to refuse anything having to do with such a seemingly corrupt and inhumane endeavor, although the technical challenges must be very interesting. The greed and complete disregard for society and it's advancement as portrayed through the media and various outlets simply make it a very unattractive career choice to me. Now this is not meant as a judgement of a whole industry and it's participants, it's simply my naive and uninformed opinion. I would like to read some comments about insiders who might have had my initial aversion, but came to see something different which is positive in some way. Any HFT devs out there with a similar experience?
- vasilipupkin 9y ago
  provision of liquidity. If HFT didn't exist, you would still be able to buy and sell financial instruments, but it would be less convenient. Maybe you go to buy something and the offer doesn't appear until 10 minutes later. With HFT it's always available. Imagine your local supermarket. What do you need it for ? You could drive straight to distributor's warehouse and buy food directly from the distributor or the farmer who grew it. The local supermarket is a middleman which provides convenience of execution. Same with HFT.
  - dna_polymerase 9y ago
    Bad analogy. HFT is not like a supermarket. HFT would rather be the guys at the local supermarket running behind you and right in the moment you're about to grab something off the shelves they grab it buy it and put it back on the shelves so you can buy it for a higher price only. And they'd be allowed to do so because they own parts of the supermarket. Oh those guys don't exist at supermarkets? Well funny...
    - dooglius 9y ago
      Nope, doesn't work like this, your orders are matched on an exchange before any notification is given.
vostok 9y ago
The benefit to me personally is that I can buy something like SPY for my retirement savings and not worry that I'm getting ripped off on the price. I just picked SPY as an arbitrary example and I'm not making any investment recommendations in this comment. The benefit to society is that less money and human capital is wasted on finance so more money and human capital can be allocated to more interesting things. HFT is a tiny industry that generates a tiny amount of money and they've largely replaced what used to be a much larger industry that generated a lot more money. That sounds like a huge benefit to me.
gech 9y ago
Young bright people diverted to work on eeking out higher margins for the capital class instead of...anything else.
- kasey_junk 9y ago
  Even if you think the machinery of trading is a negative (I don’t) that’s no argument against firms like this. If anything it’s an argument for them as these firms do the same thing as their predecessors at lower margins and with fewer people. The empty trading pits in the South Loop Chicago and all those new condos downtown NYC are a testament to that.
harrisjt 9y ago
I agree but maybe they invest in certain companies with their profit or push technology further.
sampo 9y ago
> But how do they benefit society? Tsunami hits Japan and some Japanese computer memory factories are shut down. As soon as this news hits America, the prices of computer memory chips is expected to go up. But there is a delay in how quickly different people hear the news. Some American memory chip sellers might still be selling at the old (lower) price, while some of their better-informed customers seize the opportunity to buy before the prices go up. In this instance, the sooner the news reach America, the American resellers know to increase their prices, and they get the benefit from the increased prices. (And some buyers end up paying more.) Later, the Japanese have rebuilt and the factories are about to start producing again. Now memory chip prices are expected to go back down. The sooner the new information spreads around, the more people will benefit from buying at the cheaper prices. (And some resellers will disbenefit by having to decrease their prices sooner.) The well-informed market makers keep the prices as current as possible. Buyers benefit from new, cheaper prices, but sellers disbenefit. Or the other way round. But we believe that efficient markets are beneficial to society, so the benefit for whoever gains by buying/selling at the most recent price information is larger than whoever lost because they couldn't sell/buy at the old price.
known 9y ago
https://en.m.wikipedia.org/wiki/Parable_of_the_broken_window https://en.m.wikipedia.org/wiki/Parable_of_the_broken_window

bgitarts 9y ago

They would argue that they get paid to capture market inefficiencies and make the market efficient so goods, services and companies are properly priced.

S3raph 9y ago
and they improve liquidity (reduce bid/ask spread)

tomp 9y ago

You could say the same thing about most advertising companies (i.e. including Google, Facebook and most startups).

Synaesthesia 9y ago
People have a misconception of advertising as a noble or worthy, and necessary thing. In business school it’s taught that it’s purpose is to inform rational consumers about what to buy. Actually if you look at advertisements, you learn it’s purpose is to misinform irrational consumers into buying. Advertisements have learned to use emotional messages, sex, repetition and other irrational means to sell.
- gaius 9y ago
  Quite. If a person needs a thing they will realise that themselves and go out and buy one. Advertising is 100% about things you don't need and have no real reason to purchase. https://genius.com/Bill-hicks-on-advertisers-and-marketing-annotated https://genius.com/Bill-hicks-on-advertisers-and-marketing-a...

simonh 9y ago

Many of these firms are market makers. That’s a role that has existed in markets well into the 19th century. Market makers are contractually obliged to offer a price for any security on their books. That means if you want to sell, you always can no matter what is happening in the market (unless it’s suspended). Nowadays all market makers (that I know of) trade algorithmically and given that volumes and speeds at which modern markets operate, it’s pretty much the only way they could without having to charge considerably higher market maker fees, increasing costs for everybody. Furthermore, if I want to sell a security and one of these companies puts in the best bid, then I just made more money than I otherwise would have if they weren’t there. Likewise if I was buying, they might offer me a lower price. Isn’t that a good thing? They are happy and the counterparty is happy. Then there’s arbitrage. If I am trading on an exchange, but there’s a better price on another axchange one of these firms trades on, they might offer me a better price than I otherwise get. Effectively I d get a price on the other market, without having the costs of trading on it. Again, that’s better for me, where ‘me’ might be your savings account or pension fund manager, or a manufacturer or producer on a commodities market. So these firms reduce costs for other participants on the market.

lordnacho 9y ago

Here's a very simple service that everyone would understand. Suppose you are a customer with a connection to an exchange. You can't afford to connect to every exchange, because that would cost you a small fortune. If you stick your order into this exchange, you might have to wait around for someone to meet your price. In fact, there might be someone willing to trade with you at your price, but you don't know it because you're on different exchanges. (Let's not get into NMS.) An HFT with a view of the whole market would help you distribute your order to all exchanges. They do this by leaning on your order while posting everywhere else. So if someone came in and met the HFT's order in some market, the HFT would turn around and fill you immediately for a small difference, and they'd pull all the other orders when this happened. That's a service, and you pay for it. A lot of HFT strategies provide a service similar to this in some way.

dna_polymerase 9y ago
Oh come on, if order books were generally accessible I could just see where stuff is traded right now and sell there by myself. It's just that market data for stocks is so heavily gated that HFT guys already have an edge by just buying data from all the excahnges for huge piles of cash. If this was such a great service why is IEX becoming so big? HFT is a nightmare from a CSR view. Those companies provide no real value to society (not by any standard) and even worse: By hiring all those talented young people with degrees in various fields they actually hurt society. Give those people real problems to work on, instead of wasting them on optimizing those HFT systems.
- kasey_junk 9y ago
  IEX allows and has major liquidity providing HFT firms & probably couldn’t operate without them. Also IEX is a very small exchange, not one getting huge. Their PR firm is impressive not their size. Finally there are lots of trading options that allow you multi-exchange order book access. Getting market access is fairly cheap. The expensive part is the counter party risk mitigation. You need someone to prove you are good for the trades you say you are. That has nothing to do with HFT or electronic trading at all.
- 9y ago

dsacco 9y ago

To put it succinctly: 1. All trading strategies profit by identifying market inefficiencies. 2. Market inefficiencies occur (in general) when the price of a security is inaccurate. 3. By correcting the inefficiency, the strategy profits consistently until there is no longer a counterparty willing to take the trade at that (inefficient) price. This process is broadly called price discovery.

ppod 9y ago

If there is money to be made, it means that some companies or products were not priced correctly. This means that someone is getting overpaid and someone underpaid relative to their value. Traders find the fairest price for a product, just like a trader in a traditional physical marketplace.

Synaesthesia 9y ago

It doesn't, it benefits a small amount of people, with no benefit, or probably a detriment to society at large.

kelvin0 9y ago

Glad this question came up, because I am always wondering the same. I also was approached several times to work in HFT as a software dev by some of the big firms. My subjective moral compass just seems to refuse anything having to do with such a seemingly corrupt and inhumane endeavor, although the technical challenges must be very interesting. The greed and complete disregard for society and it's advancement as portrayed through the media and various outlets simply make it a very unattractive career choice to me. Now this is not meant as a judgement of a whole industry and it's participants, it's simply my naive and uninformed opinion. I would like to read some comments about insiders who might have had my initial aversion, but came to see something different which is positive in some way. Any HFT devs out there with a similar experience?

vasilipupkin 9y ago
provision of liquidity. If HFT didn't exist, you would still be able to buy and sell financial instruments, but it would be less convenient. Maybe you go to buy something and the offer doesn't appear until 10 minutes later. With HFT it's always available. Imagine your local supermarket. What do you need it for ? You could drive straight to distributor's warehouse and buy food directly from the distributor or the farmer who grew it. The local supermarket is a middleman which provides convenience of execution. Same with HFT.
- dna_polymerase 9y ago
  Bad analogy. HFT is not like a supermarket. HFT would rather be the guys at the local supermarket running behind you and right in the moment you're about to grab something off the shelves they grab it buy it and put it back on the shelves so you can buy it for a higher price only. And they'd be allowed to do so because they own parts of the supermarket. Oh those guys don't exist at supermarkets? Well funny...
  - dooglius 9y ago
    Nope, doesn't work like this, your orders are matched on an exchange before any notification is given.

vostok 9y ago

The benefit to me personally is that I can buy something like SPY for my retirement savings and not worry that I'm getting ripped off on the price. I just picked SPY as an arbitrary example and I'm not making any investment recommendations in this comment. The benefit to society is that less money and human capital is wasted on finance so more money and human capital can be allocated to more interesting things. HFT is a tiny industry that generates a tiny amount of money and they've largely replaced what used to be a much larger industry that generated a lot more money. That sounds like a huge benefit to me.

gech 9y ago

Young bright people diverted to work on eeking out higher margins for the capital class instead of...anything else.

kasey_junk 9y ago
Even if you think the machinery of trading is a negative (I don’t) that’s no argument against firms like this. If anything it’s an argument for them as these firms do the same thing as their predecessors at lower margins and with fewer people. The empty trading pits in the South Loop Chicago and all those new condos downtown NYC are a testament to that.

harrisjt 9y ago

I agree but maybe they invest in certain companies with their profit or push technology further.

sampo 9y ago

> But how do they benefit society? Tsunami hits Japan and some Japanese computer memory factories are shut down. As soon as this news hits America, the prices of computer memory chips is expected to go up. But there is a delay in how quickly different people hear the news. Some American memory chip sellers might still be selling at the old (lower) price, while some of their better-informed customers seize the opportunity to buy before the prices go up. In this instance, the sooner the news reach America, the American resellers know to increase their prices, and they get the benefit from the increased prices. (And some buyers end up paying more.) Later, the Japanese have rebuilt and the factories are about to start producing again. Now memory chip prices are expected to go back down. The sooner the new information spreads around, the more people will benefit from buying at the cheaper prices. (And some resellers will disbenefit by having to decrease their prices sooner.) The well-informed market makers keep the prices as current as possible. Buyers benefit from new, cheaper prices, but sellers disbenefit. Or the other way round. But we believe that efficient markets are beneficial to society, so the benefit for whoever gains by buying/selling at the most recent price information is larger than whoever lost because they couldn't sell/buy at the old price.

known 9y ago

https://en.m.wikipedia.org/wiki/Parable_of_the_broken_window https://en.m.wikipedia.org/wiki/Parable_of_the_broken_window