3 ms·

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 ma

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.

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.