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Do exchanges like HF traders? I know HF traders themselves justify their own existence by claiming they provide liquidity to the markets, but I've always just s

Do exchanges like HF traders? I know HF traders themselves justify their own existence by claiming they provide liquidity to the markets, but I've always just sort-of rolled my eyes at that. They only extract value and provide none, in my opinion, tax the profits heavily. I think every exchange should pad each order by a random number between 0 and 250ms, it would take care of it. The company profiled in this video add lag https://www.youtube.com/watch?v=d8BcCLLX4N4 https://www.youtube.com/watch?v=d8BcCLLX4N4

cryptofistMonk 6y ago
I'm sure the exchanges like the buckets of money that HFTs pay them, even on their discounted commission fees. There's also billions in industry just around supporting HFTs, including FPGAs, silicon fab, networking equipment, etc. The cost to society of killing HFTs would probably be fairly large and imo the drawbacks are mostly minor.
- vladTheInhaler 6y ago
  All of the money HFTs make would have been made by other investors, presumably for reasons more related to predicting or responding to actual changes in market conditions. HFTs are parasites that basically leech value from those trades by executing them faster than you can, and forcing you to buy at a higher/sell at a lower price. I think the platonic ideal of a marketplace involves making money by determining the actual value of goods, not stealing information from others and jumping the line. They also contribute to a lot of market instability, see for instance the flash crash[1]. [1] https://en.wikipedia.org/wiki/2010_flash_crash https://en.wikipedia.org/wiki/2010_flash_crash
  - hervature 6y ago
    I don't like these type of comments because they show little understanding of how the market works. Explain the process in which the HFT firms "leech value" from your trades or "[steal] information and [jump] the line"? Your trade arrives at the exchange. Then, the HFT firms learn about your trade. They then price correct many instruments and derivatives that are all inter-related. Now, if we are talking about quote stuffing or intentionally trying to DDoS exchanges, everyone agrees this is bad behavior and is regulated against. Finally, as you mention, these type of algorithms contributed to market instability of the flash crash but it was also initiated by large (slow) directional bets. You propose taking the oxygen out of the room of a fire but one can also propose removing matches that started the fire.
    - matthewdgreen 6y ago
      If prices are out of line, that definitely seems like a place where automated trading would be valuable. But HFTs' tech advantage isn't just about finding a better arbitrage algorithm or being smarter: it's also quite clearly about exploiting a pure technical advantage over other traders. The fact that HFTs are so willing to invest in speed even to achieve a tiny advantage over other HFTs kind of gives the game away. And when people quite rightly observe that having a speed advantage over other traders obviously allows extractive behavior like frontrunning, a bunch of people on HN come out with irate counter-takes that claim HFT are an unalloyed good -- never something nuanced like, "yes HFT could allow for some extractive behavior, but it's counterbalanced by these advantages which I will explain in detail." (And the corollary, which is an explanation of "why a world where all traders have the same speed advantages wouldn't have all the claimed advantages of HFT but be even more efficient.") I guess it's also worth pointing out that these responses are usually from people who are involved in the HFT industry in some way, and usually they start out by accusing people of "not understanding the industry". Which is precisely the accusation many make against HFT: that it's so deliberately opaque that people outside the industry can't possibly determine how much extraction there is compared to value being added. Saying "trust us" or "you couldn't possibly know because you aren't on the inside profiting from it" is not the compelling argument you think it is.
      - kortilla 6y ago
        > The fact that HFTs are so willing to invest in speed even to achieve a tiny advantage over other HFTs kind of gives the game away. Re-pricing s&p500 futures offers in Chicago based on faster stock offer information from nyc is fine. It’s improving a market making strategy or taking offers that look like they will now be profitable. > And when people quite rightly observe that having a speed advantage over other traders obviously allows extractive behavior like frontrunning HFTs do not front run for fucks sake. It’s illegal and this meme needs to die. Front running is literally putting your order in front of a client’s order. Being the fastest to realize the bottom is falling out of the s&p500 and selling the futures contracts on open bids is not front running.
        6y ago
  - nickff 6y ago
    It's also possible that HFTs make less money than other traders would have made, if HFT is actually making markets more liquid.
zozbot234 6y ago
HFT does enhance liquidity and price discovery. The advantage to being "first" to trade is only there when multiple bidders are issuing orders at the exact same price point, and this is easily addressed by reducing minimum tick size so that price choices will just naturally disperse (as opposed to all being quantized at the same value).
bob1029 6y ago
Certainly exchanges love all paying customers. The liquidity argument is a good one IMO. If you did not have participants willing to arbitrage fractions of a cent per share, it could be really difficult to get the ends to meet on a daily basis for things that arent traded with as much volume as monsters like TSLA/AMD/et. al. The use of microwave links is just a natural consequence of competition within the HFT space. It might be reasonable to apply a minimum latency bound across the board as some participants have already, but I argue this would inhibit much of the innovation that got us to this point to start with. Being able to quickly clear a trade on thinly-traded securities is a wonderful thing for all involved. Capital not locked up in limit orders is more useful to humanity (in most cases).
lumost 6y ago
My understanding is that HFTs function in a complete race to the bottom, with the only profitable activity being to trade faster and with slightly faster information than the next HFT. There is no secret sauce to keep them from eating each other as the costs to create a new HFT are not all that high vs. the profit opportunity of shaving a few percent off the commissions of the dominant trading system. Faster links and faster trades between exchanges mean they carry less risk when carrying out arbitrage (while also lowering the amount of arbitrage available). The fact they made crazy profits initially is more of an artifact that they were competing against humans rather than other automated systems. In a few years we may see them reach the point of diminishing returns where all exchanges share a common pool of liquidity that adapts in a few millis to new information.
toast0 6y ago
Exchanges generally like (and provide incentives to) orders that add liquidity, which means orders that do not execute immediately. HFT orders are generally intended to not execute immediately, so exchanges would tend to like them. Of course, HFT also usually pays higher connection fees to get closer to the exchange, which probably doesn't hurt their relations with the exchange. The dark pools that HFT firms setup to trade with retail investors are probably less enjoyed by the exchanges, but at the same time, it does reduce load at the exchange, so maybe it's mixed because it reduces the exchanges' income from commissions, but also reduces their expense from operations. Padding orders by a random amount doesn't really discourage racing to get their first; if it's a uniform random, across all orders, you still want to get there first, which means you still want to get your order there quickly; and depending on implementation, you might break your order up into many smaller orders, so that some of them get there with less delay. If you wanted to disincentivize speed, what you really want to do is group orders that arrive in a given interval and treat them as arriving at the same time; you could do that with fixed intervals (1 minute, 1 second, 100 ms, whatever) or adaptive intervals based on the number of orders over the last interval, or randomly, if you like random. From what I've seen from selling employer stock over the years, the commissions have gone down (to zero), and the bid/offer spreads have gone down, and both are due to HFT firms, so as far as I can see, HFT is helping me. I can't say I've noticed a difference in execution speed, trading always seemed pretty fast, as long as I was able to setup the order via the browser.
- maest 6y ago
  I agree with most of your post, but I don't think you can safely attribute broker commissions going to 0 to HFTs.
  - toast0 6y ago
    Payment for order flow comes from dark pools, run mostly by HFT. Payment for order flow incentives brokers to get more trades, and reduced commissions gets more trades. I don't know that other brokers would have gone all the way down to $0 without Robinhood pushing them, but they were already down to $5-$10.
maest 6y ago
Both yes and no. For most exchanges: HF traders are big data consumers and they _have_ to have all the orderbook daa, so they're big customers of exchanges. They also pay for stuff like colocation. Many exchanges also provide rebates for liquidty providing orders, which HF traders are incentivised to use. One notable exception is the Investors Exchange (IEX), are vocally anti-HF.
jimbob45 6y ago
Could we not simply “batch” every trade within a second (or some nominal time value) to be concurrently executed? I like your idea though.

cryptofistMonk 6y ago

I'm sure the exchanges like the buckets of money that HFTs pay them, even on their discounted commission fees. There's also billions in industry just around supporting HFTs, including FPGAs, silicon fab, networking equipment, etc. The cost to society of killing HFTs would probably be fairly large and imo the drawbacks are mostly minor.

vladTheInhaler 6y ago
All of the money HFTs make would have been made by other investors, presumably for reasons more related to predicting or responding to actual changes in market conditions. HFTs are parasites that basically leech value from those trades by executing them faster than you can, and forcing you to buy at a higher/sell at a lower price. I think the platonic ideal of a marketplace involves making money by determining the actual value of goods, not stealing information from others and jumping the line. They also contribute to a lot of market instability, see for instance the flash crash[1]. [1] https://en.wikipedia.org/wiki/2010_flash_crash https://en.wikipedia.org/wiki/2010_flash_crash
- hervature 6y ago
  I don't like these type of comments because they show little understanding of how the market works. Explain the process in which the HFT firms "leech value" from your trades or "[steal] information and [jump] the line"? Your trade arrives at the exchange. Then, the HFT firms learn about your trade. They then price correct many instruments and derivatives that are all inter-related. Now, if we are talking about quote stuffing or intentionally trying to DDoS exchanges, everyone agrees this is bad behavior and is regulated against. Finally, as you mention, these type of algorithms contributed to market instability of the flash crash but it was also initiated by large (slow) directional bets. You propose taking the oxygen out of the room of a fire but one can also propose removing matches that started the fire.
  - matthewdgreen 6y ago
    If prices are out of line, that definitely seems like a place where automated trading would be valuable. But HFTs' tech advantage isn't just about finding a better arbitrage algorithm or being smarter: it's also quite clearly about exploiting a pure technical advantage over other traders. The fact that HFTs are so willing to invest in speed even to achieve a tiny advantage over other HFTs kind of gives the game away. And when people quite rightly observe that having a speed advantage over other traders obviously allows extractive behavior like frontrunning, a bunch of people on HN come out with irate counter-takes that claim HFT are an unalloyed good -- never something nuanced like, "yes HFT could allow for some extractive behavior, but it's counterbalanced by these advantages which I will explain in detail." (And the corollary, which is an explanation of "why a world where all traders have the same speed advantages wouldn't have all the claimed advantages of HFT but be even more efficient.") I guess it's also worth pointing out that these responses are usually from people who are involved in the HFT industry in some way, and usually they start out by accusing people of "not understanding the industry". Which is precisely the accusation many make against HFT: that it's so deliberately opaque that people outside the industry can't possibly determine how much extraction there is compared to value being added. Saying "trust us" or "you couldn't possibly know because you aren't on the inside profiting from it" is not the compelling argument you think it is.
    - kortilla 6y ago
      > The fact that HFTs are so willing to invest in speed even to achieve a tiny advantage over other HFTs kind of gives the game away. Re-pricing s&p500 futures offers in Chicago based on faster stock offer information from nyc is fine. It’s improving a market making strategy or taking offers that look like they will now be profitable. > And when people quite rightly observe that having a speed advantage over other traders obviously allows extractive behavior like frontrunning HFTs do not front run for fucks sake. It’s illegal and this meme needs to die. Front running is literally putting your order in front of a client’s order. Being the fastest to realize the bottom is falling out of the s&p500 and selling the futures contracts on open bids is not front running.
      - 6y ago
- nickff 6y ago
  It's also possible that HFTs make less money than other traders would have made, if HFT is actually making markets more liquid.

zozbot234 6y ago

HFT does enhance liquidity and price discovery. The advantage to being "first" to trade is only there when multiple bidders are issuing orders at the exact same price point, and this is easily addressed by reducing minimum tick size so that price choices will just naturally disperse (as opposed to all being quantized at the same value).

bob1029 6y ago

Certainly exchanges love all paying customers. The liquidity argument is a good one IMO. If you did not have participants willing to arbitrage fractions of a cent per share, it could be really difficult to get the ends to meet on a daily basis for things that arent traded with as much volume as monsters like TSLA/AMD/et. al. The use of microwave links is just a natural consequence of competition within the HFT space. It might be reasonable to apply a minimum latency bound across the board as some participants have already, but I argue this would inhibit much of the innovation that got us to this point to start with. Being able to quickly clear a trade on thinly-traded securities is a wonderful thing for all involved. Capital not locked up in limit orders is more useful to humanity (in most cases).

lumost 6y ago

My understanding is that HFTs function in a complete race to the bottom, with the only profitable activity being to trade faster and with slightly faster information than the next HFT. There is no secret sauce to keep them from eating each other as the costs to create a new HFT are not all that high vs. the profit opportunity of shaving a few percent off the commissions of the dominant trading system. Faster links and faster trades between exchanges mean they carry less risk when carrying out arbitrage (while also lowering the amount of arbitrage available). The fact they made crazy profits initially is more of an artifact that they were competing against humans rather than other automated systems. In a few years we may see them reach the point of diminishing returns where all exchanges share a common pool of liquidity that adapts in a few millis to new information.

toast0 6y ago

Exchanges generally like (and provide incentives to) orders that add liquidity, which means orders that do not execute immediately. HFT orders are generally intended to not execute immediately, so exchanges would tend to like them. Of course, HFT also usually pays higher connection fees to get closer to the exchange, which probably doesn't hurt their relations with the exchange. The dark pools that HFT firms setup to trade with retail investors are probably less enjoyed by the exchanges, but at the same time, it does reduce load at the exchange, so maybe it's mixed because it reduces the exchanges' income from commissions, but also reduces their expense from operations. Padding orders by a random amount doesn't really discourage racing to get their first; if it's a uniform random, across all orders, you still want to get there first, which means you still want to get your order there quickly; and depending on implementation, you might break your order up into many smaller orders, so that some of them get there with less delay. If you wanted to disincentivize speed, what you really want to do is group orders that arrive in a given interval and treat them as arriving at the same time; you could do that with fixed intervals (1 minute, 1 second, 100 ms, whatever) or adaptive intervals based on the number of orders over the last interval, or randomly, if you like random. From what I've seen from selling employer stock over the years, the commissions have gone down (to zero), and the bid/offer spreads have gone down, and both are due to HFT firms, so as far as I can see, HFT is helping me. I can't say I've noticed a difference in execution speed, trading always seemed pretty fast, as long as I was able to setup the order via the browser.

maest 6y ago
I agree with most of your post, but I don't think you can safely attribute broker commissions going to 0 to HFTs.
- toast0 6y ago
  Payment for order flow comes from dark pools, run mostly by HFT. Payment for order flow incentives brokers to get more trades, and reduced commissions gets more trades. I don't know that other brokers would have gone all the way down to $0 without Robinhood pushing them, but they were already down to $5-$10.

maest 6y ago

Both yes and no. For most exchanges: HF traders are big data consumers and they _have_ to have all the orderbook daa, so they're big customers of exchanges. They also pay for stuff like colocation. Many exchanges also provide rebates for liquidty providing orders, which HF traders are incentivised to use. One notable exception is the Investors Exchange (IEX), are vocally anti-HF.

jimbob45 6y ago

Could we not simply “batch” every trade within a second (or some nominal time value) to be concurrently executed? I like your idea though.