4 ms·

While we’re on this topic, can some expert ELI5 how or/why HFT is good for markets/economy?

ldoughty 6y ago
HFT is specifically a tool that benefits the haves (HFT) over the have nots. It can benefit stock prices for companies too, since it can cause the market to move more in their direction if machines think they should buy based on whatever they're programmed to look at. I looked into this for a while, but I simply felt it was immoral and dropped the project.
- tuyguntn 6y ago
  > It can benefit stock prices for companies too, since it can cause the market to move more in their direction which can also harm companies if algorithms decide to sell, which might trigger sell chain for everyone
- smabie 6y ago
  It's clear that you have no idea what HFT firms actually do. Which is okay, but then don't pass judgment.
LatteLazy 6y ago
It shrinks spreads saving investors money. It increases liquidity for smaller orders at least (good for retail investors). There are complex reasons why improving price discovery and price harmony between markets is good for the wider economy but they're a bit more hand-wavey...
maccam912 6y ago
I'll give it a shot. When you place an order for 1000 shares of AAPL for example your order is sent to a bunch of exchanges and you are supposed to get your shares from the 1000 cheapest shares available to be purchased. If your order gets to exchange A where a HFT is operating they might sell you 100 shares at $131.99, but then the know there is someone buying AAPL. they send orders on faster networks than you to buy up all the shares at other exchanges for 131.99, then list them for sale for 132.00. Your order arrives, and depending on order type you'll probably buy those up that milliseconds earlier would have been a penny cheaper. For you this is only $9.00 more than before, but doing this all the time is where HFT makes money, without really offering any benefit to other market participants.
- deleted 6y ago
  [deleted]
nazka 6y ago
It provides liquidity to the market. For instance you want to sell something. If you don’t have liquidity in what you are selling that means that you just have a few offers (which may not be enough for you to sell everything at once), and at various prices (so not really optimized for you). But with liquidity, here provided by HFT, you have enough quantity on the buying side to sell all at once and at a price that will be a lot more aggressively optimized. So yes they will make some pennies on your order but it’s nothing compare to the broker you use and unless you use a bad broker optimizing fees is that last thing to think about. And on top of that they provides both liquidity and price optimization for you and the market.
- ric2b 6y ago
  But HFT works by reacting faster than another market participant willing to do the same trade, so the liquidity was already there. They won't do a trade if there's no one to instantly sell to, so they aren't adding liquidity, or am I missing something?
  - idohft 6y ago
    I can see how you can come to this conclusion from this sentence, but it's a vague sentence with slightly-wrong premises, which leads you to this conclusion. If you're a programmer, I think you may appreciate this situation when others talk about your work. I can address some parts of this. "HFT works by reacting faster than another market participant" - There are a bunch of different HFT strategies. In this case, we're usually talking about market making, which means you are placing limit orders at a price where you don't believe it will execute immediately. You can react to many things - price movements, events, anything. - In placing a resting order, where is there an assumption that another participant was willing to do the same trade? Sometimes (pretty often) all the orders on a price level are HFT participants, and if you look at the market feed it's pretty easy to tell. - In that case (which I claim is pretty common), the liquidity was not already there. - If we consider that average spread sizes have reduced significantly with electronification and HFT, then you also disprove this assumption that "the liquidity was already there". Liquidity is not just the willingness to buy or sell, it's also the willingness to buy and sell at a competitive price. Otherwise, I mean, I'm always willing to pick up TSLA at $.01, and I'm always willing to sell TSLA at $500k. Doesn't mean I'm providing liquidity. "They won't do a trade if there's no one to instantly sell to" - That's simply not true. If you've taken a look at the order book, the fact that an HFT order is resting on the book (and not executed) means that there was nobody to instantly sell to. - Are you suggesting that HFT firms all know that someone is going to come through and buy at a price level, and hop in? Flash Boys suggests this (and it's possible to infer some "whale" actions if they route their orders poorly), and that type of inference is possible sometimes, due in part to the way the US Equities ecosystem is set up. But I'll also ask you - have you thought about the order of operations in which someone might "know that there is someone to instantly sell to?" Consider the CME (futures exchange), where there's a ton of HFT, and for which there are no other markets. How is your sentence supposed to work? - Also, perhaps empirically, that was simply not true for my firm, which was (and still is) a pretty successful one.

HFT is specifically a tool that benefits the haves (HFT) over the have nots. It can benefit stock prices for companies too, since it can cause the market to move more in their direction if machines think they should buy based on whatever they're programmed to look at. I looked into this for a while, but I simply felt it was immoral and dropped the project.

tuyguntn 6y ago
> It can benefit stock prices for companies too, since it can cause the market to move more in their direction which can also harm companies if algorithms decide to sell, which might trigger sell chain for everyone
smabie 6y ago
It's clear that you have no idea what HFT firms actually do. Which is okay, but then don't pass judgment.

LatteLazy 6y ago

It shrinks spreads saving investors money. It increases liquidity for smaller orders at least (good for retail investors). There are complex reasons why improving price discovery and price harmony between markets is good for the wider economy but they're a bit more hand-wavey...

maccam912 6y ago

I'll give it a shot. When you place an order for 1000 shares of AAPL for example your order is sent to a bunch of exchanges and you are supposed to get your shares from the 1000 cheapest shares available to be purchased. If your order gets to exchange A where a HFT is operating they might sell you 100 shares at $131.99, but then the know there is someone buying AAPL. they send orders on faster networks than you to buy up all the shares at other exchanges for 131.99, then list them for sale for 132.00. Your order arrives, and depending on order type you'll probably buy those up that milliseconds earlier would have been a penny cheaper. For you this is only $9.00 more than before, but doing this all the time is where HFT makes money, without really offering any benefit to other market participants.

deleted 6y ago
[deleted]

nazka 6y ago

It provides liquidity to the market. For instance you want to sell something. If you don’t have liquidity in what you are selling that means that you just have a few offers (which may not be enough for you to sell everything at once), and at various prices (so not really optimized for you). But with liquidity, here provided by HFT, you have enough quantity on the buying side to sell all at once and at a price that will be a lot more aggressively optimized. So yes they will make some pennies on your order but it’s nothing compare to the broker you use and unless you use a bad broker optimizing fees is that last thing to think about. And on top of that they provides both liquidity and price optimization for you and the market.

ric2b 6y ago
But HFT works by reacting faster than another market participant willing to do the same trade, so the liquidity was already there. They won't do a trade if there's no one to instantly sell to, so they aren't adding liquidity, or am I missing something?
- idohft 6y ago
  I can see how you can come to this conclusion from this sentence, but it's a vague sentence with slightly-wrong premises, which leads you to this conclusion. If you're a programmer, I think you may appreciate this situation when others talk about your work. I can address some parts of this. "HFT works by reacting faster than another market participant" - There are a bunch of different HFT strategies. In this case, we're usually talking about market making, which means you are placing limit orders at a price where you don't believe it will execute immediately. You can react to many things - price movements, events, anything. - In placing a resting order, where is there an assumption that another participant was willing to do the same trade? Sometimes (pretty often) all the orders on a price level are HFT participants, and if you look at the market feed it's pretty easy to tell. - In that case (which I claim is pretty common), the liquidity was not already there. - If we consider that average spread sizes have reduced significantly with electronification and HFT, then you also disprove this assumption that "the liquidity was already there". Liquidity is not just the willingness to buy or sell, it's also the willingness to buy and sell at a competitive price. Otherwise, I mean, I'm always willing to pick up TSLA at $.01, and I'm always willing to sell TSLA at $500k. Doesn't mean I'm providing liquidity. "They won't do a trade if there's no one to instantly sell to" - That's simply not true. If you've taken a look at the order book, the fact that an HFT order is resting on the book (and not executed) means that there was nobody to instantly sell to. - Are you suggesting that HFT firms all know that someone is going to come through and buy at a price level, and hop in? Flash Boys suggests this (and it's possible to infer some "whale" actions if they route their orders poorly), and that type of inference is possible sometimes, due in part to the way the US Equities ecosystem is set up. But I'll also ask you - have you thought about the order of operations in which someone might "know that there is someone to instantly sell to?" Consider the CME (futures exchange), where there's a ton of HFT, and for which there are no other markets. How is your sentence supposed to work? - Also, perhaps empirically, that was simply not true for my firm, which was (and still is) a pretty successful one.