5 ms·

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 ad

by 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-...
  - vostok 8y ago
    Just to be clear, I'm disagreeing with you because I think you're wrong about the world as it is not because our interests are opposed. I would have far more money if the US had a super complicated batch auction system and everybody could only trade on public information. It would probably only have a tiny, barely noticeable, negative effect on your life in the form of higher spreads for ETFs and various index products. > "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. I am not sure why you are bringing up this specific and very complicated example. Has this been tested in court and I'm just not aware of it? I don't even see how a company could allow its employees to engage in insider trading without it being misappropriation. The company has a responsibility to its shareholders. At a minimum, this policy would have to be disclosed to investors. Investors very frequently use data that is not publicly available. Sometimes it's mosaics that they've put together from smaller pieces of information that are not public, sometimes it's body language of executives in private meetings to which the public does not have access, sometimes it's satellite images, sometimes it's information from IR, and sometimes it's something else. None of this is illegal without additional clarification.
    - allenz 8y ago
      You're right, it was a poor example and I have deleted it. Perhaps we can agree that fairness would be an adequate justification for making insider trading illegal, and by analogy, that it would be an adequate justification for switching to batch auctions. If so, you have the burden of proof to show that the benefits of microsecond resolution outweighs our considerations of fairness.
      - vostok 8y ago
        > Perhaps we can agree that fairness would be an adequate justification for making insider trading illegal I don't think that we agree on this. The way that I see it, investors always try to leverage information asymmetry and I don't see how you could realistically outlaw it. That's what makes HFT so hard. The people who are trading against you inherently know more than you do. They've talked to the companies, they've researched them, etc. Meanwhile HFTs stand by willing to buy and sell just below and just above mid market without any of that information. This is also why HFTs are willing to pay for retail order flow. At least you know that the retail orders probably don't know more than you so you're able to capture a greater fraction of the spread. Of course retail orders are a small fraction of all orders and an even smaller fraction of orders on the exchanges.
tptacek 8y ago
Developing proprietary sources of information about companies and trading on it isn't "insider trading". And again, it's pretty fundamental to how the market works: the whole idea is that people will learn things about companies, trade on that information, profit, and in doing so gradually nudge the price of those companies to their true value. Insider trading is an agency problem where (simplifying a bit) you're brought into confidence by the company and trade against the interests of their shareholders. As an agent of the company and thus its shareholders, you're not allowed to do that. HFT traders aren't agents of anybody.
- allenz 8y ago
  I said compare insider trading. I'm aware that it doesn't involve insider information; the point is that some information advantages can be unfair. We want the market to reward real research, and not front-running.
  - tptacek 8y ago
    I don't understand what you're trying to argue. Front-running is also an agency problem: it occurs when you hire a broker/dealer to execute orders from you, and, upon receiving your order, the broker trades for their own account off it first. HFTs are proprietary traders. Front-running doesn't simply mean "someone who races to trade first". If you think about it, that definition doesn't even make sense. Does everyone who owns a Bloomberg terminal front-run everyone who doesn't?
    - allenz 8y ago
      The more expansive view of front running was most famously argued in Flash Boys, where "Lewis concludes that HFT is used as a method to front run orders placed by investors".[1] Under this definition, yes, why should traders need a Bloomberg terminal just to remain on a level playing field? The five-second batch proposal would make the market more fair. We should compete on real information and not on microsecond latency. You say that this doesn't make sense, but I'm very interested in why. Of course, we want price updates to be timely, but why would microsecond resolution be useful? [1] https://en.wikipedia.org/wiki/Flash_Boys https://en.wikipedia.org/wiki/Flash_Boys

by allenz 8y ago

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-...
- vostok 8y ago
  Just to be clear, I'm disagreeing with you because I think you're wrong about the world as it is not because our interests are opposed. I would have far more money if the US had a super complicated batch auction system and everybody could only trade on public information. It would probably only have a tiny, barely noticeable, negative effect on your life in the form of higher spreads for ETFs and various index products. > "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. I am not sure why you are bringing up this specific and very complicated example. Has this been tested in court and I'm just not aware of it? I don't even see how a company could allow its employees to engage in insider trading without it being misappropriation. The company has a responsibility to its shareholders. At a minimum, this policy would have to be disclosed to investors. Investors very frequently use data that is not publicly available. Sometimes it's mosaics that they've put together from smaller pieces of information that are not public, sometimes it's body language of executives in private meetings to which the public does not have access, sometimes it's satellite images, sometimes it's information from IR, and sometimes it's something else. None of this is illegal without additional clarification.
  - allenz 8y ago
    You're right, it was a poor example and I have deleted it. Perhaps we can agree that fairness would be an adequate justification for making insider trading illegal, and by analogy, that it would be an adequate justification for switching to batch auctions. If so, you have the burden of proof to show that the benefits of microsecond resolution outweighs our considerations of fairness.
    - vostok 8y ago
      > Perhaps we can agree that fairness would be an adequate justification for making insider trading illegal I don't think that we agree on this. The way that I see it, investors always try to leverage information asymmetry and I don't see how you could realistically outlaw it. That's what makes HFT so hard. The people who are trading against you inherently know more than you do. They've talked to the companies, they've researched them, etc. Meanwhile HFTs stand by willing to buy and sell just below and just above mid market without any of that information. This is also why HFTs are willing to pay for retail order flow. At least you know that the retail orders probably don't know more than you so you're able to capture a greater fraction of the spread. Of course retail orders are a small fraction of all orders and an even smaller fraction of orders on the exchanges.

tptacek 8y ago

Developing proprietary sources of information about companies and trading on it isn't "insider trading". And again, it's pretty fundamental to how the market works: the whole idea is that people will learn things about companies, trade on that information, profit, and in doing so gradually nudge the price of those companies to their true value. Insider trading is an agency problem where (simplifying a bit) you're brought into confidence by the company and trade against the interests of their shareholders. As an agent of the company and thus its shareholders, you're not allowed to do that. HFT traders aren't agents of anybody.

allenz 8y ago
I said compare insider trading. I'm aware that it doesn't involve insider information; the point is that some information advantages can be unfair. We want the market to reward real research, and not front-running.
- tptacek 8y ago
  I don't understand what you're trying to argue. Front-running is also an agency problem: it occurs when you hire a broker/dealer to execute orders from you, and, upon receiving your order, the broker trades for their own account off it first. HFTs are proprietary traders. Front-running doesn't simply mean "someone who races to trade first". If you think about it, that definition doesn't even make sense. Does everyone who owns a Bloomberg terminal front-run everyone who doesn't?
  - allenz 8y ago
    The more expansive view of front running was most famously argued in Flash Boys, where "Lewis concludes that HFT is used as a method to front run orders placed by investors".[1] Under this definition, yes, why should traders need a Bloomberg terminal just to remain on a level playing field? The five-second batch proposal would make the market more fair. We should compete on real information and not on microsecond latency. You say that this doesn't make sense, but I'm very interested in why. Of course, we want price updates to be timely, but why would microsecond resolution be useful? [1] https://en.wikipedia.org/wiki/Flash_Boys https://en.wikipedia.org/wiki/Flash_Boys