5 ms·

In all seriousness, I would rather see a market designed explicitly around the barring of high frequency trades. All trades taking a fixed and relatively long p

In all seriousness, I would rather see a market designed explicitly around the barring of high frequency trades. All trades taking a fixed and relatively long period (say, 30 minutes) to complete. This sort of investment strategy doesn't seem to be creating long-term market value, it's exploiting short-term edge effects in a zero-sum strategy. The arms race to pursue ever more inhumanly fast automatic trades seems to have no net value at all yet is consuming resources to impoverish the algorithmically and connectively poorer at the expense of the richer. Markets seem to be favoured because they allow prices to find their natural level from supply and demand. How is this facility helped by permitting trades to be completed and then reversed faster than any human can ever perceive? This is algorithmic gambling on edge effects far more than a true market.

secretasiandan 16y ago
What information/experience informs your critique of markets/HFT?
vecter 16y ago
I can see from your post that you're very misinformed about how markets operate and the role of high frequency traders (a.k.a. liquidity providers). Read my response to a previous comment: http://news.ycombinator.com/item?id=2164458 http://news.ycombinator.com/item?id=2164458
- ldng 16y ago
  They're just piggybacking trend and making profit of it, that how there used. Maybe not why and how they were designed. Still, IMHO, it is not fair and goes against the very definition of stock exchange.
  - uwsnyc 16y ago
    High frequency traders are simply are able to provide the most competitive price in the market. They usually do this with a strong hunch that they will be able to get out of that position in a short period of time at a better price. Are they providing a service? Absolutely. When HF traders are involved in a transaction, risk is transferred to them. No matter how short the interval is that they're trading on, they're still taking on risk. The party trading against them doesn't have to worry about what way the market is going to move after the trade is complete and they are willing to pay for that.
- tricky 16y ago
  I have nothing against HFT but I don't buy your liquidity argument. Liquidity is needed most when markets are falling outside the norm. Any algorithm with a fail-safe or kill switch will immediately shut off when times get bad thereby ending their contribution to liquidity at a time when it is needed most. Please help me understand this better if I'm incorrect. (edited for clarity)
  - secretasiandan 16y ago
    "Liquidity is needed most when markets are falling outside the norm" True but humans have fail-safes and kill switches too, thus this is not a valid argument against HFT in favor of human market makers. At any time, humans could step in and provide liquidity during the flash crash and during other crashes.
    - tricky 16y ago
      "At any time, humans could step in and provide liquidity during the flash crash and during other crashes." Humans can, and do. But algorithms can't and won't.
  - vecter 16y ago
    Short answer: there is a large demand for liquidity throughout most of the trading day. I'll give you the long answer when I get back from work.
  - vecter 16y ago
    The main point that you're missing is that there is a huge demand for liquidity during a majority of market hours. On average, 7 billion shares of US equities are traded every day. That is a monumentally large number if you think about it. According to the TABB consulting group, roughly 50-70% of American stock trades are done by HFT [1]. Let's assume that 10-20% of trading is non-profit motivated (utilitarian, you could say). That means that roughly 1 billion shares are exchanged every day by utilitarian traders. That in itself should be clear evidence that there is a large demand for liquidity. HFT market makers play an important role in those transactions. Specifically, they make it cheaper to buy and sell stocks by (1) tightening the bid-ask spread and (2) providing more quantity at each price, so that the average cost of executing an order is less. Not only that, when markets become tighter, they actually enable transactions to occur that would not have happened before. In other words, previously where buyers and sellers would NOT have traded because the transaction costs of crossing the bid-ask spread were too high, those two parties can now trade. Specifically, without HFT, there would be far fewer than 1 billion shares traded by utilitarian traders on a daily basis. To address the other point of providing liquidity "when the markets need it most", let's take a step back. When you say that "market makers should step in to provide liquidity [for society's benefit]", you're implying that there's some externality to lack of liquidity in financial markets (if so, this is yet another reason that we need HFT on a daily basis). Suppose that this is the case: there is some negative externality to society when markets are illiquid, as is oft to happen when things go crazy in the world. During those times, volatility is insanely high because the risk of being in any position is also insanely high. Remember, market makers get compensated (on average) for holding risk that you don't want. If risk is higher, naturally, the compensation should be also. This is manifested in higher costs of execution: spreads widen and the available quantity at each level decreases. If you want to force HFT market makers, which are private corporations, to step in to provide more liquidity, then you are forcing these companies to pay for that externality. In effect, they would take on huge risk for far diminished expected returns. That doesn't make any particular sense to me. However, if society as a whole has this view that some private corporations need to pay for public externalities, then that should be a matter of regulation. But if that's the case, why pick on HFT in particular? Why not force McDonalds and Whole Foods to give food to hungry people during famines? Surely, there is an externality to the food industry NOT stepping in during periods of extended hunger, "just when people need it the most." [1] http://georgewashington2.blogspot.com/2010/10/yes-70-of-us-equity-trades-are-high.html http://georgewashington2.blogspot.com/2010/10/yes-70-of-us-e...
- socillion 16y ago
  Consider a hypothetical stock currently trading at 34.05 bid, 34.06 ask. Trader A puts in a bid for 100 @ 34.06, matching Trader B's ask of 34.06. Normally, B would then sell to A, but thanks to HFT, institute C has the unique and intrinsically unfair position of being able to fulfill A's order. Assuming a moderate holding of stock, you are then able to manipulate the market up and down second-to-second by selectively fulfilling buy or sell orders and so causing supply or demand to pile up temporarily. In a zero sum game where knowledge is power, you know exactly who is buying and who is selling - before John Q. Public knows. To compound this, you can fulfill orders using immediate or cancel (IOC) orders before they hit the markets - making it impossible for others to know how much or even whether you are buying/selling.[1] In itself, there is really not much wrong with this - market makers have been doing this for decades, possibly even centuries. And as long as there is a level playing, where everyone sees orders at the same time, there really is no problem - an invaluable service in the form of liquidity is provided. Having the advantage of being able to front run the markets is not limited to just market making, however. Limits are one of the ubiquitous features of stock markets - the ability to say, I will buy or sell X shares of this stick up until it hits price Y. This can be exploited easily by HFT/front running - you have 30 ms [2] to probe out where the limit is with small IOC transactions. In this way, you are able to meet orders at prices that are different than the currently trading price - effectively bypassing all competition. Just to respond to one of your statements from the linked post: > A common misconception is that high frequency trading is like operating a money printing machine... This is false. Peruse this Forbes article, if you will - http://blogs.forbes.com/afontevecchia/2011/02/15/bernanke-put-allows-jp-morgan-to-post-profits-on-96-9-of-2010-trading-days/ http://blogs.forbes.com/afontevecchia/2011/02/15/bernanke-pu... I am interested in any civil responses to this. I am not professing to be any sort of expert on HFT. [3] Normally I would not bother responding to posts like this, preferring to avoid talking to anyone, but your slightly condescending tone was infuriating. 1. This may not be correct, in any case, the IOC would only be of the required size and so not provide any indication of holding size. 2. http://rusingwithronestar.blogspot.com/2009/07/goldman-effectively-front-running.html http://rusingwithronestar.blogspot.com/2009/07/goldman-effec... Cannot find any mainstream media confirmations that it is indeed 30ms, but this number seems well corroborated. 3. I have used HFT and front running as synonyms because they seem to be inescapably tied together. Why the need to have picosecond advantages if you aren't trying to beat another bottom feeder to the prey? edit: bah, I really dislike how HN treats newlines - I can't find any way to simply start a new line without a space in between the two sentences. Comes out like a block of text at 1366x768, or ends up looking too spread out.

secretasiandan 16y ago

What information/experience informs your critique of markets/HFT?

vecter 16y ago

I can see from your post that you're very misinformed about how markets operate and the role of high frequency traders (a.k.a. liquidity providers). Read my response to a previous comment: http://news.ycombinator.com/item?id=2164458 http://news.ycombinator.com/item?id=2164458

ldng 16y ago
They're just piggybacking trend and making profit of it, that how there used. Maybe not why and how they were designed. Still, IMHO, it is not fair and goes against the very definition of stock exchange.
- uwsnyc 16y ago
  High frequency traders are simply are able to provide the most competitive price in the market. They usually do this with a strong hunch that they will be able to get out of that position in a short period of time at a better price. Are they providing a service? Absolutely. When HF traders are involved in a transaction, risk is transferred to them. No matter how short the interval is that they're trading on, they're still taking on risk. The party trading against them doesn't have to worry about what way the market is going to move after the trade is complete and they are willing to pay for that.
tricky 16y ago
I have nothing against HFT but I don't buy your liquidity argument. Liquidity is needed most when markets are falling outside the norm. Any algorithm with a fail-safe or kill switch will immediately shut off when times get bad thereby ending their contribution to liquidity at a time when it is needed most. Please help me understand this better if I'm incorrect. (edited for clarity)
- secretasiandan 16y ago
  "Liquidity is needed most when markets are falling outside the norm" True but humans have fail-safes and kill switches too, thus this is not a valid argument against HFT in favor of human market makers. At any time, humans could step in and provide liquidity during the flash crash and during other crashes.
  - tricky 16y ago
    "At any time, humans could step in and provide liquidity during the flash crash and during other crashes." Humans can, and do. But algorithms can't and won't.
- vecter 16y ago
  Short answer: there is a large demand for liquidity throughout most of the trading day. I'll give you the long answer when I get back from work.
- vecter 16y ago
  The main point that you're missing is that there is a huge demand for liquidity during a majority of market hours. On average, 7 billion shares of US equities are traded every day. That is a monumentally large number if you think about it. According to the TABB consulting group, roughly 50-70% of American stock trades are done by HFT [1]. Let's assume that 10-20% of trading is non-profit motivated (utilitarian, you could say). That means that roughly 1 billion shares are exchanged every day by utilitarian traders. That in itself should be clear evidence that there is a large demand for liquidity. HFT market makers play an important role in those transactions. Specifically, they make it cheaper to buy and sell stocks by (1) tightening the bid-ask spread and (2) providing more quantity at each price, so that the average cost of executing an order is less. Not only that, when markets become tighter, they actually enable transactions to occur that would not have happened before. In other words, previously where buyers and sellers would NOT have traded because the transaction costs of crossing the bid-ask spread were too high, those two parties can now trade. Specifically, without HFT, there would be far fewer than 1 billion shares traded by utilitarian traders on a daily basis. To address the other point of providing liquidity "when the markets need it most", let's take a step back. When you say that "market makers should step in to provide liquidity [for society's benefit]", you're implying that there's some externality to lack of liquidity in financial markets (if so, this is yet another reason that we need HFT on a daily basis). Suppose that this is the case: there is some negative externality to society when markets are illiquid, as is oft to happen when things go crazy in the world. During those times, volatility is insanely high because the risk of being in any position is also insanely high. Remember, market makers get compensated (on average) for holding risk that you don't want. If risk is higher, naturally, the compensation should be also. This is manifested in higher costs of execution: spreads widen and the available quantity at each level decreases. If you want to force HFT market makers, which are private corporations, to step in to provide more liquidity, then you are forcing these companies to pay for that externality. In effect, they would take on huge risk for far diminished expected returns. That doesn't make any particular sense to me. However, if society as a whole has this view that some private corporations need to pay for public externalities, then that should be a matter of regulation. But if that's the case, why pick on HFT in particular? Why not force McDonalds and Whole Foods to give food to hungry people during famines? Surely, there is an externality to the food industry NOT stepping in during periods of extended hunger, "just when people need it the most." [1] http://georgewashington2.blogspot.com/2010/10/yes-70-of-us-equity-trades-are-high.html http://georgewashington2.blogspot.com/2010/10/yes-70-of-us-e...
socillion 16y ago
Consider a hypothetical stock currently trading at 34.05 bid, 34.06 ask. Trader A puts in a bid for 100 @ 34.06, matching Trader B's ask of 34.06. Normally, B would then sell to A, but thanks to HFT, institute C has the unique and intrinsically unfair position of being able to fulfill A's order. Assuming a moderate holding of stock, you are then able to manipulate the market up and down second-to-second by selectively fulfilling buy or sell orders and so causing supply or demand to pile up temporarily. In a zero sum game where knowledge is power, you know exactly who is buying and who is selling - before John Q. Public knows. To compound this, you can fulfill orders using immediate or cancel (IOC) orders before they hit the markets - making it impossible for others to know how much or even whether you are buying/selling.[1] In itself, there is really not much wrong with this - market makers have been doing this for decades, possibly even centuries. And as long as there is a level playing, where everyone sees orders at the same time, there really is no problem - an invaluable service in the form of liquidity is provided. Having the advantage of being able to front run the markets is not limited to just market making, however. Limits are one of the ubiquitous features of stock markets - the ability to say, I will buy or sell X shares of this stick up until it hits price Y. This can be exploited easily by HFT/front running - you have 30 ms [2] to probe out where the limit is with small IOC transactions. In this way, you are able to meet orders at prices that are different than the currently trading price - effectively bypassing all competition. Just to respond to one of your statements from the linked post: > A common misconception is that high frequency trading is like operating a money printing machine... This is false. Peruse this Forbes article, if you will - http://blogs.forbes.com/afontevecchia/2011/02/15/bernanke-put-allows-jp-morgan-to-post-profits-on-96-9-of-2010-trading-days/ http://blogs.forbes.com/afontevecchia/2011/02/15/bernanke-pu... I am interested in any civil responses to this. I am not professing to be any sort of expert on HFT. [3] Normally I would not bother responding to posts like this, preferring to avoid talking to anyone, but your slightly condescending tone was infuriating. 1. This may not be correct, in any case, the IOC would only be of the required size and so not provide any indication of holding size. 2. http://rusingwithronestar.blogspot.com/2009/07/goldman-effectively-front-running.html http://rusingwithronestar.blogspot.com/2009/07/goldman-effec... Cannot find any mainstream media confirmations that it is indeed 30ms, but this number seems well corroborated. 3. I have used HFT and front running as synonyms because they seem to be inescapably tied together. Why the need to have picosecond advantages if you aren't trying to beat another bottom feeder to the prey? edit: bah, I really dislike how HN treats newlines - I can't find any way to simply start a new line without a space in between the two sentences. Comes out like a block of text at 1366x768, or ends up looking too spread out.