6 ms·

What’s the value in making HFT not work? What harm is it causing?

btilly 6y ago
It is hundreds of millions of dollars that are being spent for an activity that is a tax on investors. The fact that it is better than what existed before doesn't change the fact that we can do better yet.
- smabie 6y ago
  In general, HFT charges a lot less tax than the market makers of old. And for retail investors, HFT helps them a lot.
  - tqi 6y ago
    How do HFT help retail investors? While I understand that HFT are not technically front running, it seems to me (as someone who is not that involved with finance) that functionally it's more or less the same outcome?
    - andreareina 6y ago
      Smaller spreads. Plus I imagine that most retail investors don't make orders large enough that they need to be fulfilled at multiple exchanges, so HFT won't have the chance to get in front of retail.
      - btilly 6y ago
        Actually, HFT is willing to pay retail brokerages like Robinhood to get access to orders from retail investors BEFORE they hit the exchanges. This is how trades are offered for free. Why? Because they know that they can buy those shares at some reported price then trade them on their own books then sell them at a price sufficiently different from the reported price that they make a profit. This means that HFT is explicitly getting "in front of retail" and is actually trading at a price different from what retail hears about. That difference goes where? Oh right. Right into the pockets of HFT and out of the pockets of retail investors.
        andreareina 6y ago
        Matt Levine claims that payment for order flow still benefits the retail trader: https://www.bloomberg.com/opinion/articles/2018-10-16/carl-icahn-wants-to-fight-dell-again https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i....
        btilly 6y ago
        I'm not willing to pay Bloomberg to read that. But on a reasonable assumption what he is arguing is that the competition in the marketplace means that they are paying competitive prices for that order flow. They are making money but not much considering what they are doing. And it is massively better than what used to exist. I know this and agree with it. But as I said above, "The fact that it is better than what existed before doesn't change the fact that we can do better yet." The first point is that Robinhood is the one that they negotiate with. So the extra profits go there, and not directly to consumers. Secondly the HFT middlemen are still playing market makers, which means that they still are being paid for. There are cheaper ways to make a market work than HFT, and I outlined one above. Third, automated algorithms as market makers have the potential for some pretty dramatic events - such as the flash crash. Alternatives can avoid that.
  - btilly 6y ago
    What part of The fact that it is better than what existed before doesn't change the fact that we can do better yet. did you fail to understand? Yes, HFT manages to do better than the old market makers that had humans doing the same job that HFT does now in the same way with bigger margins. But that doesn't change the fact that for retail investors, I believe that my suggestion in https://news.ycombinator.com/item?id=24760841 https://news.ycombinator.com/item?id=24760841 would help them even more.
spicybright 6y ago
Fairness maybe? People rent server racks right next to the exchange to get a leg up responding to market forces. Lots of others won't be able to compete with that foresight. Whether you think that's a good or bad thing though I guess can be up for debate.
- ryanlol 6y ago
  > of others won't be able to compete with that foresight. Those who can’t compete aren’t even going to try, nobody loses here.
ineedasername 6y ago
HFT can increase market volatility and exagerate trends. They are not beholden to and can run counter to the idea of an "affirmative obligation" to help keep the market operating orderly. Hence the occasional flash crash or more minor blips.
- smabie 6y ago
  eh, there's not much evidence that HFT increases volatility. I work in HFT and in general, HFT decreases volatility. Of course the flash crash is a notable exception, but that would never happen today.
  - tasuki 6y ago
    My intuition also says HFT should usually decrease volatility. Why would a flash crash never happen today?
    - gen3 6y ago
      I would assume that they are referring to the circuit breakers. I wouldn’t consider that fully “fixing” flash crashes.
  - ineedasername 6y ago
    There's plenty of evidence that HFT increases volatility [0][1][2]. Flash crashes still happen [3] and there were multiple rapid crashes triggering limit down circuit breakers in 2020. The circuit breakers stopped things from getting worse, but didn't stop the crash itself. [0] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1691679 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1691679 [1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2573677 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2573677 [2] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2573677 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2573677 [3] https://www.cnbc.com/2015/09/25/what-happened-during-the-aug-24-flash-crash.html https://www.cnbc.com/2015/09/25/what-happened-during-the-aug...

It is hundreds of millions of dollars that are being spent for an activity that is a tax on investors. The fact that it is better than what existed before doesn't change the fact that we can do better yet.

smabie 6y ago
In general, HFT charges a lot less tax than the market makers of old. And for retail investors, HFT helps them a lot.
- tqi 6y ago
  How do HFT help retail investors? While I understand that HFT are not technically front running, it seems to me (as someone who is not that involved with finance) that functionally it's more or less the same outcome?
  - andreareina 6y ago
    Smaller spreads. Plus I imagine that most retail investors don't make orders large enough that they need to be fulfilled at multiple exchanges, so HFT won't have the chance to get in front of retail.
    - btilly 6y ago
      Actually, HFT is willing to pay retail brokerages like Robinhood to get access to orders from retail investors BEFORE they hit the exchanges. This is how trades are offered for free. Why? Because they know that they can buy those shares at some reported price then trade them on their own books then sell them at a price sufficiently different from the reported price that they make a profit. This means that HFT is explicitly getting "in front of retail" and is actually trading at a price different from what retail hears about. That difference goes where? Oh right. Right into the pockets of HFT and out of the pockets of retail investors.
      - andreareina 6y ago
        Matt Levine claims that payment for order flow still benefits the retail trader: https://www.bloomberg.com/opinion/articles/2018-10-16/carl-icahn-wants-to-fight-dell-again https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i....
        btilly 6y ago
        I'm not willing to pay Bloomberg to read that. But on a reasonable assumption what he is arguing is that the competition in the marketplace means that they are paying competitive prices for that order flow. They are making money but not much considering what they are doing. And it is massively better than what used to exist. I know this and agree with it. But as I said above, "The fact that it is better than what existed before doesn't change the fact that we can do better yet." The first point is that Robinhood is the one that they negotiate with. So the extra profits go there, and not directly to consumers. Secondly the HFT middlemen are still playing market makers, which means that they still are being paid for. There are cheaper ways to make a market work than HFT, and I outlined one above. Third, automated algorithms as market makers have the potential for some pretty dramatic events - such as the flash crash. Alternatives can avoid that.
- btilly 6y ago
  What part of The fact that it is better than what existed before doesn't change the fact that we can do better yet. did you fail to understand? Yes, HFT manages to do better than the old market makers that had humans doing the same job that HFT does now in the same way with bigger margins. But that doesn't change the fact that for retail investors, I believe that my suggestion in https://news.ycombinator.com/item?id=24760841 https://news.ycombinator.com/item?id=24760841 would help them even more.

spicybright 6y ago

Fairness maybe? People rent server racks right next to the exchange to get a leg up responding to market forces. Lots of others won't be able to compete with that foresight. Whether you think that's a good or bad thing though I guess can be up for debate.

ryanlol 6y ago
> of others won't be able to compete with that foresight. Those who can’t compete aren’t even going to try, nobody loses here.

ineedasername 6y ago

HFT can increase market volatility and exagerate trends. They are not beholden to and can run counter to the idea of an "affirmative obligation" to help keep the market operating orderly. Hence the occasional flash crash or more minor blips.

smabie 6y ago
eh, there's not much evidence that HFT increases volatility. I work in HFT and in general, HFT decreases volatility. Of course the flash crash is a notable exception, but that would never happen today.
- tasuki 6y ago
  My intuition also says HFT should usually decrease volatility. Why would a flash crash never happen today?
  - gen3 6y ago
    I would assume that they are referring to the circuit breakers. I wouldn’t consider that fully “fixing” flash crashes.
- ineedasername 6y ago
  There's plenty of evidence that HFT increases volatility [0][1][2]. Flash crashes still happen [3] and there were multiple rapid crashes triggering limit down circuit breakers in 2020. The circuit breakers stopped things from getting worse, but didn't stop the crash itself. [0] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1691679 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1691679 [1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2573677 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2573677 [2] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2573677 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2573677 [3] https://www.cnbc.com/2015/09/25/what-happened-during-the-aug-24-flash-crash.html https://www.cnbc.com/2015/09/25/what-happened-during-the-aug...