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A while ago someone made the interesting point that the costs of HFT are not being accounted for, from a free-market perspective. Exchanges typically charge for

A while ago someone made the interesting point that the costs of HFT are not being accounted for, from a free-market perspective. Exchanges typically charge for completed trades, not for orders, so traders can flood exchanges with very large amounts of orders. In practice, traders that flood exchanges will face penalties--but that only slows the arms race. The natural economic question is: if HFT traders are making more orders than is efficient, who loses? The answer almost certainly has to be the exchange, and those traders who are losing the time race to HFT's order-spamming advantage. But when Joe the Consumer places an order on the exchange, he always get the best price--it's hard to imagine a way Joe, or even Joe's Mutual Fund, can anything but benefit from HFT.

grandalf 16y ago
Exactly. HFT disempowers market makers b/c all those orders create extra liquidity with worse spread for market makers. The anti-HFT sentiment is similar to the opposition to electronic exchanges and demands that all pricing be centrally routed -- the old school exchanges realize they have a sweet deal and so they try to fight off other sources of trades/liquidity/pricing.
- HockeyPlayer 16y ago
  You are confused. Most HFT shops are market makers.
  - grandalf 16y ago
    Technically you're correct, but I was referring to the traditional market making firms who buy seats on exchanges to do business in a handful of stocks.
    - HockeyPlayer 16y ago
      ok, I understand your point. I think we agree that the HFT firms tightening spreads is good for consumers.
baltcode 16y ago
So they should have a very small fee for orders as well, proportional to its actual cost, but not high enough to dissuade people experimenting with pricing as long as they don't cost other people anything.
- yummyfajitas 16y ago
  Typically there is a (very low) order fee - off the top of my head, I'm not sure if it's levied by the broker or matching engine. There is also a limit on the number of orders one can place. Your broker will typically demand fill rates of at least 0.5-1% and will impose limits on the number of orders you can place in a rolling window.
  - HockeyPlayer 16y ago
    Not in my experience. Most HFT shops only pay if an order fills; and if they are adding liquidity to stocks, they get a rebate. If your messages/fills ratio gets REALLY wacky, the exchange might complain.
intended 16y ago
I know a way people suffer because of HFT - the flash crash(es). Should the market fall, the HFT leave the scene. Joe Consumer suddenly finds that he has no one on the other end of the trading counter. The market is essentially an illusion. http://en.wikipedia.org/wiki/2010_Flash_Crash http://en.wikipedia.org/wiki/2010_Flash_Crash The discussion page is actually quite interesting, and makes for an educational thread in itself. Short summary - HFT left the table after creating a mess. A large sale in e-minis started a trading pattern between where algorithms kept trading back and forth between each other, causing the prices to drop. After a point there was No liquidity and stub trades, which were never supposed to see the light of day, got executed. This resulted in some stocks going for a dollar, while others for many times market value. Sometime after this markets trading was brought to a halt and the regulators stepped in. A large portion of the trades made were nullified. Effectively the markets were reset, order was restored manually, before it was brought back online. At this point the market returned to equilibrium and started recovering. From the Wikipedia article, the SEC report on HFT is below: Impact of High Frequency traders: Regulators found they exacerbated price declines. As noted above, regulators found that high frequency traders exacerbated price declines as they sold aggressively to eliminate their long positions and as they withdrew from the markets in the face of uncertainty.[8][9][10][11] Other theories postulate that the actions of high frequency traders (HFTs) was the underlying cause of the flash crash. One hypothesis, based on the analysis of bid-offer data by Nanex, Llc., is that HFTs send non-executable orders (orders that are outside the bid-offer spread) to exchanges in batches. Though the purpose of these orders is unknown, some experts speculate that their purpose is to increase noise, clog exchanges, and outwit competitors.[26] However, other experts believe that deliberate market manipulation is unlikely because there is no practical way in which the HFTs can profit from these orders, and it is more likely that these orders are designed to test latency times and to detect early price trends.[27] Whatever the reasons behind the possible existence of these orders, this theory postulates that they exacerbated the crash by overloading the exchanges on May 6.[26][27] On September 3, 2010 the regulators probing the crash concluded: "that quote-stuffing – placing and then almost immediately cancelling large numbers of rapid-fire orders to buy or sell stocks – was not a “major factor” in the turmoil." [28] Some have put forth the theory High-frequency trading actually have been a major factor in minimizing and reversing the flash crash.[29] Do note that the person defending the HFT is a HFT trader himself - Jim Simons of quantitative hedge fund Renaissance Technologies. His contention is that HFT saved the day by brining liquidity back. I think this claim is simply wrong and his motivations dubious at best. If no HFT funds were there, and this had to be manually checked, the flash crash would not have happened. They have since added circuit breakers to the exchange to prevent re-occurrences.

grandalf 16y ago

Exactly. HFT disempowers market makers b/c all those orders create extra liquidity with worse spread for market makers. The anti-HFT sentiment is similar to the opposition to electronic exchanges and demands that all pricing be centrally routed -- the old school exchanges realize they have a sweet deal and so they try to fight off other sources of trades/liquidity/pricing.

HockeyPlayer 16y ago
You are confused. Most HFT shops are market makers.
- grandalf 16y ago
  Technically you're correct, but I was referring to the traditional market making firms who buy seats on exchanges to do business in a handful of stocks.
  - HockeyPlayer 16y ago
    ok, I understand your point. I think we agree that the HFT firms tightening spreads is good for consumers.

baltcode 16y ago

So they should have a very small fee for orders as well, proportional to its actual cost, but not high enough to dissuade people experimenting with pricing as long as they don't cost other people anything.

yummyfajitas 16y ago
Typically there is a (very low) order fee - off the top of my head, I'm not sure if it's levied by the broker or matching engine. There is also a limit on the number of orders one can place. Your broker will typically demand fill rates of at least 0.5-1% and will impose limits on the number of orders you can place in a rolling window.
- HockeyPlayer 16y ago
  Not in my experience. Most HFT shops only pay if an order fills; and if they are adding liquidity to stocks, they get a rebate. If your messages/fills ratio gets REALLY wacky, the exchange might complain.

intended 16y ago

I know a way people suffer because of HFT - the flash crash(es). Should the market fall, the HFT leave the scene. Joe Consumer suddenly finds that he has no one on the other end of the trading counter. The market is essentially an illusion. http://en.wikipedia.org/wiki/2010_Flash_Crash http://en.wikipedia.org/wiki/2010_Flash_Crash The discussion page is actually quite interesting, and makes for an educational thread in itself. Short summary - HFT left the table after creating a mess. A large sale in e-minis started a trading pattern between where algorithms kept trading back and forth between each other, causing the prices to drop. After a point there was No liquidity and stub trades, which were never supposed to see the light of day, got executed. This resulted in some stocks going for a dollar, while others for many times market value. Sometime after this markets trading was brought to a halt and the regulators stepped in. A large portion of the trades made were nullified. Effectively the markets were reset, order was restored manually, before it was brought back online. At this point the market returned to equilibrium and started recovering. From the Wikipedia article, the SEC report on HFT is below: Impact of High Frequency traders: Regulators found they exacerbated price declines. As noted above, regulators found that high frequency traders exacerbated price declines as they sold aggressively to eliminate their long positions and as they withdrew from the markets in the face of uncertainty.[8][9][10][11] Other theories postulate that the actions of high frequency traders (HFTs) was the underlying cause of the flash crash. One hypothesis, based on the analysis of bid-offer data by Nanex, Llc., is that HFTs send non-executable orders (orders that are outside the bid-offer spread) to exchanges in batches. Though the purpose of these orders is unknown, some experts speculate that their purpose is to increase noise, clog exchanges, and outwit competitors.[26] However, other experts believe that deliberate market manipulation is unlikely because there is no practical way in which the HFTs can profit from these orders, and it is more likely that these orders are designed to test latency times and to detect early price trends.[27] Whatever the reasons behind the possible existence of these orders, this theory postulates that they exacerbated the crash by overloading the exchanges on May 6.[26][27] On September 3, 2010 the regulators probing the crash concluded: "that quote-stuffing – placing and then almost immediately cancelling large numbers of rapid-fire orders to buy or sell stocks – was not a “major factor” in the turmoil." [28] Some have put forth the theory High-frequency trading actually have been a major factor in minimizing and reversing the flash crash.[29] Do note that the person defending the HFT is a HFT trader himself - Jim Simons of quantitative hedge fund Renaissance Technologies. His contention is that HFT saved the day by brining liquidity back. I think this claim is simply wrong and his motivations dubious at best. If no HFT funds were there, and this had to be manually checked, the flash crash would not have happened. They have since added circuit breakers to the exchange to prevent re-occurrences.