4 ms·

You claim that batch auctions are the same without addressing the arguments in the article, namely that (1) HFT is unfair to smaller traders, and (2) HFT is an

by allenz 8y ago

You claim that batch auctions are the same without addressing the arguments in the article, namely that (1) HFT is unfair to smaller traders, and (2) HFT is an arms race where the costs (materials, labor, and brainpower) exceed the benefits. Here's the fairness argument: a severe negative report comes out about stock X. In a fair world, after the price updates, every investor loses the same per share of X that they held. In the real world, HFT can sell or short X before others can react, resulting in a net transfer of wealth from investors to HFT firms.

vostok 8y ago
That's not my argument at all. My claim is that technology is still a huge advantage with batch auctions. It might even be a bigger advantage with batch auctions. More complex market structure usually benefits those who understand it best. I also don't understand your argument about HFTs having an advantage over investors. Investors have advantages over HFTs too. Are those unfair? Why are you so concerned about the advantages that HFTs have over investors, but not advantages that investors have over HFTs? I also hope you understand how small the HFT industry is. There are single very large investors who make more than the entire HFT industry.
- allenz 8y ago
  How are batch auctions more complex? You still use the same rules for resolving priority. How can the rules be gamed? Investors do not have any unfair advantages over technical traders. They take different approaches for price discovery, but both should be rewarded. HFTs have the unfair advantage of having faster access to information, including analyst reports.[1] [1] https://www.bloomberg.com/professional/product/news/ https://www.bloomberg.com/professional/product/news/
  - vostok 8y ago
    I'm not going to delve any further into technical details of batch auctions. I never said anything about unfair advantages. You're the one who's ascribing fairness to this whole thing. I just fail to see how hiring smart engineers (HFTs) is an unfair advantage whereas hiring smart former investment bankers and research analysts (hedge funds, mutual funds, other investors) is not. It just seems like yet another baseless attack on technical nerds. Also I hope I didn't give the impression that HFTs and investors are competing with each other. HFTs more naturally compete with banks and other market makers. It's just that the advantages that investors have are one of the reasons why HFTs don't expect to make half a spread every time they trade. You could argue that the work of HFTs is less important than work of investors and that they should make less than the investors do. I would agree with you, but this is already the case and it's not even close how much more money investors make.
    - allenz 8y ago
      > HFTs and investors [don't compete] I started with an example where investors lose money due to adverse selection from HFTs, and I don't think that you've really addressed that argument.
throwawaymath 8y ago
Arguments (1) and (2) run counter to both academic investigation[1,3] and industrial consensus[4,5]. Outside of IEX and its affiliates, you don't really find mainstream criticism of HFT from authoritative sources. As a particular point of contention: most academic studies of the subject find that HFT activity has significantly improved liquidity and price accuracy across e.g. equity trading. But at the same time, HFT as an aggregate industry is both tiny and shrinking. Despite accounting for nearly 60% of equity trading volume last year, the HFT industry had aggregate revenues of ~$1B[2]. So no, it's not a net wealth transfer from investors to HFT firms, and their (ostensibly positive) impact is dramatically outsized compared to their activity (this is aside from the fact that HFT activity is virtually imperceptible to retail traders anyway). As a meta comment, I think you should reexamine your assertion about what would happen in a "fair world", because it's game theoretically vacuous. Under your paradigm, how does price discovery function when informational and temporal asymmetry are eliminated? How would the market exist and accomplish its functions in a way substantially similar to the way it does presently? Stated another way, what "fair" advantages would you allow market participants to compete with that are not already a function of information asymmetry or speed? _________________ 1. https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.2010.01624.x https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261... 2. https://www.ft.com/content/d81f96ea-d43c-11e7-a303-9060cb1e5f44 https://www.ft.com/content/d81f96ea-d43c-11e7-a303-9060cb1e5... 3. https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1602.pdf https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1602.pdf 4. https://www.bloomberg.com/view/articles/2014-06-20/why-i-love-high-speed-trading https://www.bloomberg.com/view/articles/2014-06-20/why-i-lov... 5. https://www.wsj.com/articles/high-frequency-hyperbole-1396394601 https://www.wsj.com/articles/high-frequency-hyperbole-139639...
- allenz 8y ago
  Thanks for the thoughtful response. I'm still reading through the efficiency analyses. I note that none of your sources refute the fairness argument. Source [3] concedes it, concluding that "HFTs impose adverse selection costs on other investors, by trading with them when they (HFTs) have better information". > how does price discovery function [without] asymmetry? what "fair" advantages would you allow Why wouldn't the market work without information asymmetry? Pricing would still be a difficult problem because in practice, it's difficult to predict the future even with "perfect" information. The market will reward good judgment. I agree that the market also motivates useful information discovery, such as satellite imagery, but this ties back into the question of whether microsecond pricing actually increases efficiency.
tptacek 8y ago
Your argument presupposes that there is some constant per-share price to be paid for a piece of bad news, when in fact it is the function of the market, through trading, to arrive at a consensus valuation for that news.
- allenz 8y ago
  I can rephrase without that assumption. The argument is that high speed traders are able to trade before others can receive or react to information. The time advantage therefore translates to an unfair information advantage. Compare insider trading, which we make illegal because it is unfair, even though it improves the price signal. The direct benefit of the real-time market vs. batch auctions is that pricing information is updated faster in the real-time market, but is there any need for microsecond resolution pricing?
  - vostok 8y ago
    > Compare insider trading, which we make illegal because it is unfair, even though it improves the price signal. Insider trading is arguably illegal because you're misappropriating company information for your own use. There a few other technical points, but they can be ignored in a casual conversation. This applies if the CEO told you something that they shouldn't have or if they told you something in confidence and you abused that trust. Trading on information that others don't have is generally legal and investors do it to a much greater extent and to much greater profit than HFTs. > The direct benefit from HFT is that pricing information is updated faster in the market, but is there any need for microsecond resolution pricing? The big direct benefit comes from maintaining fair prices for ETFs and other products whose prices depend on other products. Furthermore, "microsecond" pricing is a very natural system. HFTs and other market makers put out passive limit orders whenever they want. Investors and other aggressive participants send marketable (usually limit) orders if it's the price that they want. It's the far more complicated batch auctions that need to justify their existence.
    - allenz 8y ago
      The SEC says that insider trading is illegal because it "undermines investor confidence in the fairness and integrity of the securities markets".[1] [1] https://www.investor.gov/additional-resources/general-resources/glossary/insider-trading https://www.investor.gov/additional-resources/general-resour... Edit, previous response: Fairness is the "straightforward", "textbook answer" as to why insider trading is illegal. Misappropriating company information" isn't a great justification because insider trading is still illegal even if a company explicitly allowed employees to trade on nonpublic information. [1] https://blogs.wsj.com/law/2011/10/26/why-exactly-is-insider-trading-illegal/* https://blogs.wsj.com/law/2011/10/26/why-exactly-is-insider-...

by allenz 8y ago

vostok 8y ago

That's not my argument at all. My claim is that technology is still a huge advantage with batch auctions. It might even be a bigger advantage with batch auctions. More complex market structure usually benefits those who understand it best. I also don't understand your argument about HFTs having an advantage over investors. Investors have advantages over HFTs too. Are those unfair? Why are you so concerned about the advantages that HFTs have over investors, but not advantages that investors have over HFTs? I also hope you understand how small the HFT industry is. There are single very large investors who make more than the entire HFT industry.

allenz 8y ago
How are batch auctions more complex? You still use the same rules for resolving priority. How can the rules be gamed? Investors do not have any unfair advantages over technical traders. They take different approaches for price discovery, but both should be rewarded. HFTs have the unfair advantage of having faster access to information, including analyst reports.[1] [1] https://www.bloomberg.com/professional/product/news/ https://www.bloomberg.com/professional/product/news/
- vostok 8y ago
  I'm not going to delve any further into technical details of batch auctions. I never said anything about unfair advantages. You're the one who's ascribing fairness to this whole thing. I just fail to see how hiring smart engineers (HFTs) is an unfair advantage whereas hiring smart former investment bankers and research analysts (hedge funds, mutual funds, other investors) is not. It just seems like yet another baseless attack on technical nerds. Also I hope I didn't give the impression that HFTs and investors are competing with each other. HFTs more naturally compete with banks and other market makers. It's just that the advantages that investors have are one of the reasons why HFTs don't expect to make half a spread every time they trade. You could argue that the work of HFTs is less important than work of investors and that they should make less than the investors do. I would agree with you, but this is already the case and it's not even close how much more money investors make.
  - allenz 8y ago
    > HFTs and investors [don't compete] I started with an example where investors lose money due to adverse selection from HFTs, and I don't think that you've really addressed that argument.

throwawaymath 8y ago

Arguments (1) and (2) run counter to both academic investigation[1,3] and industrial consensus[4,5]. Outside of IEX and its affiliates, you don't really find mainstream criticism of HFT from authoritative sources. As a particular point of contention: most academic studies of the subject find that HFT activity has significantly improved liquidity and price accuracy across e.g. equity trading. But at the same time, HFT as an aggregate industry is both tiny and shrinking. Despite accounting for nearly 60% of equity trading volume last year, the HFT industry had aggregate revenues of ~$1B[2]. So no, it's not a net wealth transfer from investors to HFT firms, and their (ostensibly positive) impact is dramatically outsized compared to their activity (this is aside from the fact that HFT activity is virtually imperceptible to retail traders anyway). As a meta comment, I think you should reexamine your assertion about what would happen in a "fair world", because it's game theoretically vacuous. Under your paradigm, how does price discovery function when informational and temporal asymmetry are eliminated? How would the market exist and accomplish its functions in a way substantially similar to the way it does presently? Stated another way, what "fair" advantages would you allow market participants to compete with that are not already a function of information asymmetry or speed? _________________ 1. https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.2010.01624.x https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261... 2. https://www.ft.com/content/d81f96ea-d43c-11e7-a303-9060cb1e5f44 https://www.ft.com/content/d81f96ea-d43c-11e7-a303-9060cb1e5... 3. https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1602.pdf https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1602.pdf 4. https://www.bloomberg.com/view/articles/2014-06-20/why-i-love-high-speed-trading https://www.bloomberg.com/view/articles/2014-06-20/why-i-lov... 5. https://www.wsj.com/articles/high-frequency-hyperbole-1396394601 https://www.wsj.com/articles/high-frequency-hyperbole-139639...

allenz 8y ago
Thanks for the thoughtful response. I'm still reading through the efficiency analyses. I note that none of your sources refute the fairness argument. Source [3] concedes it, concluding that "HFTs impose adverse selection costs on other investors, by trading with them when they (HFTs) have better information". > how does price discovery function [without] asymmetry? what "fair" advantages would you allow Why wouldn't the market work without information asymmetry? Pricing would still be a difficult problem because in practice, it's difficult to predict the future even with "perfect" information. The market will reward good judgment. I agree that the market also motivates useful information discovery, such as satellite imagery, but this ties back into the question of whether microsecond pricing actually increases efficiency.

tptacek 8y ago

Your argument presupposes that there is some constant per-share price to be paid for a piece of bad news, when in fact it is the function of the market, through trading, to arrive at a consensus valuation for that news.

allenz 8y ago
I can rephrase without that assumption. The argument is that high speed traders are able to trade before others can receive or react to information. The time advantage therefore translates to an unfair information advantage. Compare insider trading, which we make illegal because it is unfair, even though it improves the price signal. The direct benefit of the real-time market vs. batch auctions is that pricing information is updated faster in the real-time market, but is there any need for microsecond resolution pricing?
- vostok 8y ago
  > Compare insider trading, which we make illegal because it is unfair, even though it improves the price signal. Insider trading is arguably illegal because you're misappropriating company information for your own use. There a few other technical points, but they can be ignored in a casual conversation. This applies if the CEO told you something that they shouldn't have or if they told you something in confidence and you abused that trust. Trading on information that others don't have is generally legal and investors do it to a much greater extent and to much greater profit than HFTs. > The direct benefit from HFT is that pricing information is updated faster in the market, but is there any need for microsecond resolution pricing? The big direct benefit comes from maintaining fair prices for ETFs and other products whose prices depend on other products. Furthermore, "microsecond" pricing is a very natural system. HFTs and other market makers put out passive limit orders whenever they want. Investors and other aggressive participants send marketable (usually limit) orders if it's the price that they want. It's the far more complicated batch auctions that need to justify their existence.
  - allenz 8y ago
    The SEC says that insider trading is illegal because it "undermines investor confidence in the fairness and integrity of the securities markets".[1] [1] https://www.investor.gov/additional-resources/general-resources/glossary/insider-trading https://www.investor.gov/additional-resources/general-resour... Edit, previous response: Fairness is the "straightforward", "textbook answer" as to why insider trading is illegal. Misappropriating company information" isn't a great justification because insider trading is still illegal even if a company explicitly allowed employees to trade on nonpublic information. [1] https://blogs.wsj.com/law/2011/10/26/why-exactly-is-insider-trading-illegal/* https://blogs.wsj.com/law/2011/10/26/why-exactly-is-insider-...