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Most HFT shops are relatively small. HFT is all about latency and turn over. Big quant shops might have HFT elements but lean far more towards systematic/algo s

Most HFT shops are relatively small. HFT is all about latency and turn over. Big quant shops might have HFT elements but lean far more towards systematic/algo strategies that can be relatively high latency (still super low latency, but not HFT) because these are the only strategies that you can deploy serious var with. The guys crushing HFT are not huge hedge funds, and they are solving more engineering problems than building trading models. Also, no, small traders don't lose. Retail traders et al get much tighter spreads, cheaper execution by routing to internalizers, etc. It's big institutionals with size to trade that get front run and have to worry about HFT killing their shortfall. On the institutional side, it's about lit venues preferring HFT w/ special orders types and thin top of book. On the retail side, the issue mostly comes down to direct feed vs. SIP/CQS thanks to NBBO that opened the door for latency arb courtesy of yet more regulation. Blame your regulators folks. This is why dark pools became a thing. > and the liquidity support they provide to the markets is dubious, at best, since they pull the plug as soon as things get crazy This bit is certainly true. Source: hedge fund trader who hates HFT not in principal but because they are good at what they do

mikert5671 8y ago
This used to be true. Small HFT firms can find a niche thats profitable, but thats because there isnt enough money to be made by the big firms in those niches. In the last few years there has been massive consolidation of the smaller HFT players, the space is commoditized and controlled by a few firms.
- qeternity 8y ago
  Yes, consolidation and layoffs. Go see how many KCG guys were kept by Virtu. If anything the industry has gotten smaller. People are just buying up flow now. There are no "big" HFT firms when compared to proper buy side. > the space is commoditized and controlled by a few firms Few firms != big firms
  - mikert5671 8y ago
    Yeah its funny, I still read outrage about those greedy "HFT players", as if HFT was still highly relevant. It was a blip in time of the financial markets when no one had high speed trading but a few. The alpha has been washed away.
    - qeternity 8y ago
      "c[1] is a bitch" - most HFT quants past few years [1] - https://en.wikipedia.org/wiki/Speed_of_light https://en.wikipedia.org/wiki/Speed_of_light
    - minhazm423 8y ago
      > The alpha has been washed away. whats that mean? so what are quants on the street doing now?
      - qeternity 8y ago
        Quant !== HFT
        minhazm423 8y ago
        whats the diff? What are people working on hft solutions called then?
- minhazm423 8y ago
  any resources or further reading u can point me to?
karpodiem 8y ago
"Also, no, small traders don't lose. Retail traders et al get much tighter spreads, cheaper execution by routing to internalizers, etc." There's liquidity until there isn't. It was easier to get an order filled during a run to the exit pre-HFT. When everyone runs to the exit in an HFT world, retail investors are the last to get their orders filled, if they're lucky.
- tptacek 8y ago
  I don't know if this is true, but higher liquidity and lower spreads reduces the cost of every trade, which is money in the pockets of retail and value investors. I assume this is why Vanguard says HFT has been helpful for them (despite the fact that they don't do HFT themselves).
  - unclebucknasty 8y ago
    Aren't the cost of the trade and price of the trade two different things? Tighter spreads can only do so much to offset disadvantageous pricing, right?
    - qeternity 8y ago
      What difference are you making between tighter spreads and disadvantageous pricing?
    - JamesBarney 8y ago
      No, you cant. The spread is the difference between the bid and the ask. You can't have disadvantageous pricing without affecting the ask. Which would in term drive up the spread.
      - unclebucknasty 8y ago
        HFT helps tighten spreads for smaller investors, and also itself benefits from the tighter spreads. But, to the extent that you believe the argument that HFT is essentially front-running, then HFT gets the tight spreads and better pricing.
MR4D 8y ago
Of course the retail guy gets hurt. Who do you think buys the mutual funds that pay a higher price. Seriously, I hear this all the time, but it’s only one step removed. Why does everybody keep repeating this lie?
- physguy1123 8y ago
  Vanguard states that hft activities have lowered their trading costs, so I don't think this claim is necesarily true.
  - qeternity 8y ago
    HFT has reduced costs under 99.99% of market environments. My direct cost and slippage is still so much lower than it would have been 30 years ago. Hell, even 10 years ago.
    - arcticfox 8y ago
      Where would the profits that go to HFT outfits go if HFT wasn't a thing? Genuine question, I have no idea how that works.
      - physguy1123 8y ago
        They would go to whomever else was marker makers, whomever else was doing short-term trading, and some of fhe rest to quant firms doing frequent but not hft trading. Mostly human traders/market makers in short.
      - mrchicity 8y ago
        They would simply vaporize. At the margin, people trade because the frictional costs (spreads, fees, pricing/tracking error, risk) of trading are low. Fewer people would trade. HFTs basically play an intermediary role: risking capital to buffer supply/demand imbalances, aiming to buy things at a discount or sell at a premium to their perceived value. The more transactions an intermediary does, the smaller his margins per transaction can be. Low margins fuel even more transactions in a virtuous cycle, and competition drives margins down. Take this thought experiment to an extreme level. What would happen if short term speculation were banned, all stocks traded January 1, and had to be held for a year? Only very wealthy people with high risk tolerance could participate in the market, since they couldn't sell companies at will to fund personal expenses or if the business underperformed. Volumes would plummet. Exchange/brokerage fees would be a significant percentage of the deal size, similar to what real estate agents charge, since they can only do a few transactions. Intermediaries would be something akin to a private equity fund, bidding 10-20%+ under value to cover the risk of holding for a year. Even with trading reduced to once a minute/hour/day, many trades HFTs take the other side of now--say a medium frequency quant fund believes a company is underpriced by 0.1%--simply would not exist anymore, because spreads and fees would increase. Most ETFs would disappear. The marginal cost for an HFT to make markets in some small ETF is basically 0, but a human would make more at McDonalds than market making an ETF that trades a few hundred thousand shares a day.
ericnyamu 8y ago
Could you write a blogpost about all this complicated hft stuff? Thanks

mikert5671 8y ago

This used to be true. Small HFT firms can find a niche thats profitable, but thats because there isnt enough money to be made by the big firms in those niches. In the last few years there has been massive consolidation of the smaller HFT players, the space is commoditized and controlled by a few firms.

qeternity 8y ago
Yes, consolidation and layoffs. Go see how many KCG guys were kept by Virtu. If anything the industry has gotten smaller. People are just buying up flow now. There are no "big" HFT firms when compared to proper buy side. > the space is commoditized and controlled by a few firms Few firms != big firms
- mikert5671 8y ago
  Yeah its funny, I still read outrage about those greedy "HFT players", as if HFT was still highly relevant. It was a blip in time of the financial markets when no one had high speed trading but a few. The alpha has been washed away.
  - qeternity 8y ago
    "c[1] is a bitch" - most HFT quants past few years [1] - https://en.wikipedia.org/wiki/Speed_of_light https://en.wikipedia.org/wiki/Speed_of_light
  - minhazm423 8y ago
    > The alpha has been washed away. whats that mean? so what are quants on the street doing now?
    - qeternity 8y ago
      Quant !== HFT
      - minhazm423 8y ago
        whats the diff? What are people working on hft solutions called then?
minhazm423 8y ago
any resources or further reading u can point me to?

karpodiem 8y ago

"Also, no, small traders don't lose. Retail traders et al get much tighter spreads, cheaper execution by routing to internalizers, etc." There's liquidity until there isn't. It was easier to get an order filled during a run to the exit pre-HFT. When everyone runs to the exit in an HFT world, retail investors are the last to get their orders filled, if they're lucky.

tptacek 8y ago
I don't know if this is true, but higher liquidity and lower spreads reduces the cost of every trade, which is money in the pockets of retail and value investors. I assume this is why Vanguard says HFT has been helpful for them (despite the fact that they don't do HFT themselves).
- unclebucknasty 8y ago
  Aren't the cost of the trade and price of the trade two different things? Tighter spreads can only do so much to offset disadvantageous pricing, right?
  - qeternity 8y ago
    What difference are you making between tighter spreads and disadvantageous pricing?
  - JamesBarney 8y ago
    No, you cant. The spread is the difference between the bid and the ask. You can't have disadvantageous pricing without affecting the ask. Which would in term drive up the spread.
    - unclebucknasty 8y ago
      HFT helps tighten spreads for smaller investors, and also itself benefits from the tighter spreads. But, to the extent that you believe the argument that HFT is essentially front-running, then HFT gets the tight spreads and better pricing.

MR4D 8y ago

Of course the retail guy gets hurt. Who do you think buys the mutual funds that pay a higher price. Seriously, I hear this all the time, but it’s only one step removed. Why does everybody keep repeating this lie?

physguy1123 8y ago
Vanguard states that hft activities have lowered their trading costs, so I don't think this claim is necesarily true.
- qeternity 8y ago
  HFT has reduced costs under 99.99% of market environments. My direct cost and slippage is still so much lower than it would have been 30 years ago. Hell, even 10 years ago.
  - arcticfox 8y ago
    Where would the profits that go to HFT outfits go if HFT wasn't a thing? Genuine question, I have no idea how that works.
    - physguy1123 8y ago
      They would go to whomever else was marker makers, whomever else was doing short-term trading, and some of fhe rest to quant firms doing frequent but not hft trading. Mostly human traders/market makers in short.
    - mrchicity 8y ago
      They would simply vaporize. At the margin, people trade because the frictional costs (spreads, fees, pricing/tracking error, risk) of trading are low. Fewer people would trade. HFTs basically play an intermediary role: risking capital to buffer supply/demand imbalances, aiming to buy things at a discount or sell at a premium to their perceived value. The more transactions an intermediary does, the smaller his margins per transaction can be. Low margins fuel even more transactions in a virtuous cycle, and competition drives margins down. Take this thought experiment to an extreme level. What would happen if short term speculation were banned, all stocks traded January 1, and had to be held for a year? Only very wealthy people with high risk tolerance could participate in the market, since they couldn't sell companies at will to fund personal expenses or if the business underperformed. Volumes would plummet. Exchange/brokerage fees would be a significant percentage of the deal size, similar to what real estate agents charge, since they can only do a few transactions. Intermediaries would be something akin to a private equity fund, bidding 10-20%+ under value to cover the risk of holding for a year. Even with trading reduced to once a minute/hour/day, many trades HFTs take the other side of now--say a medium frequency quant fund believes a company is underpriced by 0.1%--simply would not exist anymore, because spreads and fees would increase. Most ETFs would disappear. The marginal cost for an HFT to make markets in some small ETF is basically 0, but a human would make more at McDonalds than market making an ETF that trades a few hundred thousand shares a day.

ericnyamu 8y ago

Could you write a blogpost about all this complicated hft stuff? Thanks