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HFT has significantly lowered trading costs for all investors. Here's a statement from the CEO of Vanguard espousing this position: https://www.cnbc.com/2014/0

by harryh 6y ago

HFT has significantly lowered trading costs for all investors. Here's a statement from the CEO of Vanguard espousing this position: https://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-frequency-trading-firms.html https://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-... Because of automation, the amount of resources used for trading have actually decreased. Computers are a lot cheaper that the many many humans who used to be involved in the process.

hendzen 6y ago
I think it’s more nuanced in reality. There are liquidity providing HFT strategies that profit off the spread - this is good for people moving big size like Vanguard. Then there are liquidity taking strategies that profit by picking off quotes in anticipation of a probable price move. I don’t see how those strategies help Vanguard. Also, most HFT firms do a mix of both types strategies...
- harryh 6y ago
  Ya, it's certainly more nuanced than I was going to get across in just a few sentences. Mainly I wanted to push back against: "the field contributes nothing to society, and has only negative externalities"
  - VRay 6y ago
    I think it's fair to say that someone is going to contribute less to society working on HFT than they would by using the same skills to work at NASA or SpaceX, though
    - rhexs 6y ago
      No....uh....”liquidity”.
- 1e-9 6y ago
  The markets need aggressive orders as well as passive orders. There is nothing inherently bad about liquidity taking. It is generally just as beneficial as liquidity providing. If anything, the misuse of passive orders is probably more common than the misuse of aggressive orders because passive orders can be used to influence a market without trading. Even the taking of liquidity in the anticipation of a price move is not inherently bad. It is only bad if it degrades market efficiency (for example, by adding instability). An aggressive order that anticipates a price move due to an existing market inefficiency (for example, a sudden over-reaction to a report) benefits the market by speeding price discovery and adding stability. As to your question of how an aggressive HFT strategy could benefit Vanguard, consider that if Vanguard places a passive order, it is because Vanguard hopes to attract an aggressive matching order. If they are unable to attract one within their time requirement, they will likely need to change their order to a less-profitable price. Their time requirement could be quite short during times of great volatility. An HFT strategy able to more-quickly recognize that Vanguard's original price was attractive would save Vanguard the cost of a price change. This benefit can be particularly large during significant market stress when participants are forced to liquidate assets in order to manage risk.
  - hendzen 6y ago
    The aggressive liquidity taking strategies cause wider spreads and shallower books as liquidity providers are forced to quote wider and smaller to avoid those adversely selected orders. This essentially is a small tax (or rent) collected from all other market participants.
    - gruez 6y ago
      >The aggressive liquidity taking strategies cause wider spreads and shallower books as liquidity providers are forced to quote wider and smaller to avoid those adversely selected orders Is there evidence for this?
      - 8bitsout 6y ago
        I think that this is common knowledge in market microstructure, but I've read about this specific relationship between market makers and adverse selection in the book, "Trades, Quotes and Prices".
chiph 6y ago
I remember the days in the early 80's when Merrill Lynch would charge $70 for a trade. That's the equivalent to $190 today. And people paid it because the low-cost firms like Schwab weren't well-known and people thought "If they're that cheap, they can't be any good."
- deleted 6y ago
  [deleted]
- uplyftcapital 6y ago
  You can thank HFT for the ubiquitous free trades that most brokers now provide.
tehjoker 6y ago
If you have to justify the contribution to society in terms of the stock market instead of some materially useful metric like meals served, people put in housing, technologies invented or some such thing, there are ways to provide retirement plans that have nothing to do with the stock market.
- harryh 6y ago
  Thinking of the stock market as merely "a way to provide retirement plans" is wrong. It costs money to serve meals, put people in housing and invent technologies. Where does a lot of that money come from? Our financial system (of which the stock market is a key component). A better functioning financial system enables progress in lots of other industries.
  - tehjoker 6y ago
    You can have a financial system without a stock market. It would be constituted with public banks or various kinds of credit unions. The reason I cited retirement plans is that is the most sympathetic argument I could think of for caring about the stock market going up. Only ~20% of Americans own stocks, so it going up basically just enriches 1/5th of the population at the expense of the rest.
    - harryh 6y ago
      You can have a financial system without a stock market. It would be constituted with public banks or various kinds of credit unions. Not really. A financial system that only consisted of debt and not equity would not be able to support anything like our current economy. We would all be much poorer for it. Loans are simply not suitable for a huge variety of financial risks.
    - yellowstuff 6y ago
      You can imagine a successful financial system without a stock market if you don't know much about financial systems, in the same way that you can imagine a jet flying without wings if you don't know much about aerodynamics. I believe that the rise of importance of finance has been a net good for humanity, but I know that's an unpopular opinion and I've seen good arguments that it's a net harm. But I don't think you can make a reasonable argument that we could have a modern world anything like the current one without stock markets. Banks and credit unions don't, can't and shouldn't provide the kind of funding that equity markets do.

by harryh 6y ago

hendzen 6y ago

I think it’s more nuanced in reality. There are liquidity providing HFT strategies that profit off the spread - this is good for people moving big size like Vanguard. Then there are liquidity taking strategies that profit by picking off quotes in anticipation of a probable price move. I don’t see how those strategies help Vanguard. Also, most HFT firms do a mix of both types strategies...

harryh 6y ago
Ya, it's certainly more nuanced than I was going to get across in just a few sentences. Mainly I wanted to push back against: "the field contributes nothing to society, and has only negative externalities"
- VRay 6y ago
  I think it's fair to say that someone is going to contribute less to society working on HFT than they would by using the same skills to work at NASA or SpaceX, though
  - rhexs 6y ago
    No....uh....”liquidity”.
1e-9 6y ago
The markets need aggressive orders as well as passive orders. There is nothing inherently bad about liquidity taking. It is generally just as beneficial as liquidity providing. If anything, the misuse of passive orders is probably more common than the misuse of aggressive orders because passive orders can be used to influence a market without trading. Even the taking of liquidity in the anticipation of a price move is not inherently bad. It is only bad if it degrades market efficiency (for example, by adding instability). An aggressive order that anticipates a price move due to an existing market inefficiency (for example, a sudden over-reaction to a report) benefits the market by speeding price discovery and adding stability. As to your question of how an aggressive HFT strategy could benefit Vanguard, consider that if Vanguard places a passive order, it is because Vanguard hopes to attract an aggressive matching order. If they are unable to attract one within their time requirement, they will likely need to change their order to a less-profitable price. Their time requirement could be quite short during times of great volatility. An HFT strategy able to more-quickly recognize that Vanguard's original price was attractive would save Vanguard the cost of a price change. This benefit can be particularly large during significant market stress when participants are forced to liquidate assets in order to manage risk.
- hendzen 6y ago
  The aggressive liquidity taking strategies cause wider spreads and shallower books as liquidity providers are forced to quote wider and smaller to avoid those adversely selected orders. This essentially is a small tax (or rent) collected from all other market participants.
  - gruez 6y ago
    >The aggressive liquidity taking strategies cause wider spreads and shallower books as liquidity providers are forced to quote wider and smaller to avoid those adversely selected orders Is there evidence for this?
    - 8bitsout 6y ago
      I think that this is common knowledge in market microstructure, but I've read about this specific relationship between market makers and adverse selection in the book, "Trades, Quotes and Prices".

chiph 6y ago

I remember the days in the early 80's when Merrill Lynch would charge $70 for a trade. That's the equivalent to $190 today. And people paid it because the low-cost firms like Schwab weren't well-known and people thought "If they're that cheap, they can't be any good."

deleted 6y ago
[deleted]
uplyftcapital 6y ago
You can thank HFT for the ubiquitous free trades that most brokers now provide.

tehjoker 6y ago

If you have to justify the contribution to society in terms of the stock market instead of some materially useful metric like meals served, people put in housing, technologies invented or some such thing, there are ways to provide retirement plans that have nothing to do with the stock market.

harryh 6y ago
Thinking of the stock market as merely "a way to provide retirement plans" is wrong. It costs money to serve meals, put people in housing and invent technologies. Where does a lot of that money come from? Our financial system (of which the stock market is a key component). A better functioning financial system enables progress in lots of other industries.
- tehjoker 6y ago
  You can have a financial system without a stock market. It would be constituted with public banks or various kinds of credit unions. The reason I cited retirement plans is that is the most sympathetic argument I could think of for caring about the stock market going up. Only ~20% of Americans own stocks, so it going up basically just enriches 1/5th of the population at the expense of the rest.
  - harryh 6y ago
    You can have a financial system without a stock market. It would be constituted with public banks or various kinds of credit unions. Not really. A financial system that only consisted of debt and not equity would not be able to support anything like our current economy. We would all be much poorer for it. Loans are simply not suitable for a huge variety of financial risks.
  - yellowstuff 6y ago
    You can imagine a successful financial system without a stock market if you don't know much about financial systems, in the same way that you can imagine a jet flying without wings if you don't know much about aerodynamics. I believe that the rise of importance of finance has been a net good for humanity, but I know that's an unpopular opinion and I've seen good arguments that it's a net harm. But I don't think you can make a reasonable argument that we could have a modern world anything like the current one without stock markets. Banks and credit unions don't, can't and shouldn't provide the kind of funding that equity markets do.