5 ms·

Could you explain this more? I don't know much about this world. I understand they are not making the world a better place, but are they making it worse? Somet

Could you explain this more? I don't know much about this world. I understand they are not making the world a better place, but are they making it worse? Something that I have heard is that they are providing a service by providing liquidity to the market.

quickthrowman 6y ago
You are correct, HFT firms provide a valuable thing: liquidity in financial markets which leads to smaller bid/ask spreads. They aren’t making things worse, lower transaction costs are good for everyone that participates in markets, which includes the OP.
- jliptzin 6y ago
  In theory yea but during a crisis or other high volatility situation where the market needs liquidity the most they’re the first ones to pull their bids/asks.
  - traK6Dcm 6y ago
    Even if that was true (it's difficult to prove either way since there is little data on black swan events), the fact that they provide liquidity during stable times can make up for not providing liquidity during black swans. The impact could still be net-positive. Also, it's unclear what the alternative is. While HFT may not be needed, markets run by human traders were significantly more unfair than anything we have now. It's just that fewer people complained about it because nothing was transparent. Or do you believe human traders don't pull quotes?
    - jliptzin 6y ago
      I don't really have an opinion on how to make the market fair one way or another, I just advocate for retail investors to completely dispense with the idea that the market will be fair to them. I see a lot of people getting into day trading not realizing that the whole thing is completely rigged, from front-runners, insider traders, hedge fund managers with huge pockets spreading fake news (watch Jim Cramer brag about all his different market manipulation tactics: https://www.youtube.com/watch?v=gMShFx5rThI https://www.youtube.com/watch?v=gMShFx5rThI), etc. Unless you are prepared to engage in that kind of behavior as well (and have the resources to do it), expect to lose your money. Your only option is to buy and hold for the very long term.
- ric2b 6y ago
  Does it really matter if you save 1 or 2 cents when buying a bunch of stocks?
  - badfrog 6y ago
    If your 401k has ETFs or mutual funds in it, the fund managers are rebalancing every month or every quarter. Saving small amounts of money on these transactions really adds up when you think about compounding over decades.
paulgb 6y ago
I am a believer in markets and generally buy the idea that HFT produces value by providing liquidity, but I interviewed at an HFT firm where we spent most of the time talking about microwave networks that cut down transmission times by nanoseconds. I have a hard time telling myself the story that an arms race over milliseconds is creating as much value as it captures. E.g. from WSJ: > [Jim Barksdale] spent an estimated $300 million or more to bury a fiber-optic cable that shaved three-thousandths of a second off communications between New York and Chicago
- AllanHoustonSt 6y ago
  The industry as a whole provides net value to the market by via higher liquidity and tighter spreads. The arms race is a necessity due to rising competition. HFTs cannibalize each other every year. People on the outside seem to think being in HFT inherently means you’re printing money but they don’t acknowledge how tough the business actually is. Many firms have either collapsed or have been bought out over the past decade. Market makers specifically (who inherently have to operate in HFT time horizons) don't even compete with low-mid frequency hedge funds and props. They don't compete with retail investors. They strictly compete against other MMs to capture the spread.
  - gas9S9zw3P9c 6y ago
    Out of curiosity, why do MMs have to operate on HFT time horizons? Couldn't they operate on a somewhat lower frequencies by quoting wider? Sure, they won't see the same profits, but why is it impossible?
    - AllanHoustonSt 6y ago
      Traders (be it hedge funds, props, retail, anyone) will only "take your action" if you price competitively. You'll never get your orders filled. The open bid and ask as per whatever the exchange quotes are really the only prices that matter when it comes to what actually gets executed. Also even if you do quote wider, to effectively capture the spread, your buy on one side and your sell on the other side still have to basically occur simultaneously which is where the demand for latency comes in so you really can't escape it. That said there are ways to still be profitable even if you know you're not the fastest gun in the west across the most exchanges. Without going into too many details you'd have to selectively choose where/what you trade. Which is not trivial at all of course.
traK6Dcm 6y ago
> I understand they are not making the world a better place, but are they making it worse? Most people would argue that they are not directly making the world a worse place, but rather that they are sucking in talent that could have used their skills in other places to make the world a better place. For example, many talented Physicists ended up in trading companies a few decades ago. Today, you can make a similar argument for companies such as Google or FB who probably have tons of extremely intelligent scientists working on ads. > Something that I have heard is that they are providing a service by providing liquidity to the market. It's unquestionable that they provide liquidity, at least most of the time. That's good. What's questionable is whether they are doing it in an efficient way. Their primary goal is not to provide liquidity - it's to make money. Liquidity is just kind of a side effect of their activities, which is an elaborate race to "beat" other firms through speed and algorithms. Most of the resources go towards that, but don't result in additional liquidity, most of which is probably not even needed. It's like saying "FB provides an important service by allowing you to message your friends" - sure, that's not wrong, but that's not their primary goal. And you don't need a trillion dollar to make a messaging app. The difference is that FB also does lots of other things, so it's unclear how much of their resources are actually wasted vs. potentially used for "making the world a better place" - it's not quite as obvious that they are wasting a lot of talent and capital. The other question is what the alternative would be. Markets run by human traders were significantly more unfair than anything we have now, but HFT was never meant to happen, it was just result of markets becoming electronic and transparent, and people trying to extract more money.

quickthrowman 6y ago

You are correct, HFT firms provide a valuable thing: liquidity in financial markets which leads to smaller bid/ask spreads. They aren’t making things worse, lower transaction costs are good for everyone that participates in markets, which includes the OP.

jliptzin 6y ago
In theory yea but during a crisis or other high volatility situation where the market needs liquidity the most they’re the first ones to pull their bids/asks.
- traK6Dcm 6y ago
  Even if that was true (it's difficult to prove either way since there is little data on black swan events), the fact that they provide liquidity during stable times can make up for not providing liquidity during black swans. The impact could still be net-positive. Also, it's unclear what the alternative is. While HFT may not be needed, markets run by human traders were significantly more unfair than anything we have now. It's just that fewer people complained about it because nothing was transparent. Or do you believe human traders don't pull quotes?
  - jliptzin 6y ago
    I don't really have an opinion on how to make the market fair one way or another, I just advocate for retail investors to completely dispense with the idea that the market will be fair to them. I see a lot of people getting into day trading not realizing that the whole thing is completely rigged, from front-runners, insider traders, hedge fund managers with huge pockets spreading fake news (watch Jim Cramer brag about all his different market manipulation tactics: https://www.youtube.com/watch?v=gMShFx5rThI https://www.youtube.com/watch?v=gMShFx5rThI), etc. Unless you are prepared to engage in that kind of behavior as well (and have the resources to do it), expect to lose your money. Your only option is to buy and hold for the very long term.
ric2b 6y ago
Does it really matter if you save 1 or 2 cents when buying a bunch of stocks?
- badfrog 6y ago
  If your 401k has ETFs or mutual funds in it, the fund managers are rebalancing every month or every quarter. Saving small amounts of money on these transactions really adds up when you think about compounding over decades.

paulgb 6y ago

I am a believer in markets and generally buy the idea that HFT produces value by providing liquidity, but I interviewed at an HFT firm where we spent most of the time talking about microwave networks that cut down transmission times by nanoseconds. I have a hard time telling myself the story that an arms race over milliseconds is creating as much value as it captures. E.g. from WSJ: > [Jim Barksdale] spent an estimated $300 million or more to bury a fiber-optic cable that shaved three-thousandths of a second off communications between New York and Chicago

AllanHoustonSt 6y ago
The industry as a whole provides net value to the market by via higher liquidity and tighter spreads. The arms race is a necessity due to rising competition. HFTs cannibalize each other every year. People on the outside seem to think being in HFT inherently means you’re printing money but they don’t acknowledge how tough the business actually is. Many firms have either collapsed or have been bought out over the past decade. Market makers specifically (who inherently have to operate in HFT time horizons) don't even compete with low-mid frequency hedge funds and props. They don't compete with retail investors. They strictly compete against other MMs to capture the spread.
- gas9S9zw3P9c 6y ago
  Out of curiosity, why do MMs have to operate on HFT time horizons? Couldn't they operate on a somewhat lower frequencies by quoting wider? Sure, they won't see the same profits, but why is it impossible?
  - AllanHoustonSt 6y ago
    Traders (be it hedge funds, props, retail, anyone) will only "take your action" if you price competitively. You'll never get your orders filled. The open bid and ask as per whatever the exchange quotes are really the only prices that matter when it comes to what actually gets executed. Also even if you do quote wider, to effectively capture the spread, your buy on one side and your sell on the other side still have to basically occur simultaneously which is where the demand for latency comes in so you really can't escape it. That said there are ways to still be profitable even if you know you're not the fastest gun in the west across the most exchanges. Without going into too many details you'd have to selectively choose where/what you trade. Which is not trivial at all of course.

traK6Dcm 6y ago

> I understand they are not making the world a better place, but are they making it worse? Most people would argue that they are not directly making the world a worse place, but rather that they are sucking in talent that could have used their skills in other places to make the world a better place. For example, many talented Physicists ended up in trading companies a few decades ago. Today, you can make a similar argument for companies such as Google or FB who probably have tons of extremely intelligent scientists working on ads. > Something that I have heard is that they are providing a service by providing liquidity to the market. It's unquestionable that they provide liquidity, at least most of the time. That's good. What's questionable is whether they are doing it in an efficient way. Their primary goal is not to provide liquidity - it's to make money. Liquidity is just kind of a side effect of their activities, which is an elaborate race to "beat" other firms through speed and algorithms. Most of the resources go towards that, but don't result in additional liquidity, most of which is probably not even needed. It's like saying "FB provides an important service by allowing you to message your friends" - sure, that's not wrong, but that's not their primary goal. And you don't need a trillion dollar to make a messaging app. The difference is that FB also does lots of other things, so it's unclear how much of their resources are actually wasted vs. potentially used for "making the world a better place" - it's not quite as obvious that they are wasting a lot of talent and capital. The other question is what the alternative would be. Markets run by human traders were significantly more unfair than anything we have now, but HFT was never meant to happen, it was just result of markets becoming electronic and transparent, and people trying to extract more money.