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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

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.
    - balthigor 6y ago
      > HFTs do not front run for fucks sake. It’s illegal ... This is objectively false. Cursing does not strengthen an argument. HFTs paid to jump the queue. It should be illegal but it is not. There are a number of low-latency strategies that are beneficial for price discovery such as index arbitrage or market-making (with requirements to stay in the market). A strategy that is not beneficial is to pay the exchange for first-look. That is front-running.
      - kortilla 6y ago
        First look is still not front running. Unless you are able to get your order in before other orders, it’s not front running. Get it? Being the first to look at new orders is nice, but the orders are in the queue so there is no way to get in front of them. Here is a link to help you: https://www.investopedia.com/terms/f/frontrunning.asp https://www.investopedia.com/terms/f/frontrunning.asp It’s very well-defined in the industry and when you complain about something completely unrelated using that term it muddies the argument for the general public and makes you sound ignorant to the people involved with the industry (both regulators and private participants). I cursed because it’s the same ignorant argument over and over spreading false information about how the market functions. Actual front running is illegal and companies would get shut down in a heart beat if they were doing it.
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.

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.
  - balthigor 6y ago
    > HFTs do not front run for fucks sake. It’s illegal ... This is objectively false. Cursing does not strengthen an argument. HFTs paid to jump the queue. It should be illegal but it is not. There are a number of low-latency strategies that are beneficial for price discovery such as index arbitrage or market-making (with requirements to stay in the market). A strategy that is not beneficial is to pay the exchange for first-look. That is front-running.
    - kortilla 6y ago
      First look is still not front running. Unless you are able to get your order in before other orders, it’s not front running. Get it? Being the first to look at new orders is nice, but the orders are in the queue so there is no way to get in front of them. Here is a link to help you: https://www.investopedia.com/terms/f/frontrunning.asp https://www.investopedia.com/terms/f/frontrunning.asp It’s very well-defined in the industry and when you complain about something completely unrelated using that term it muddies the argument for the general public and makes you sound ignorant to the people involved with the industry (both regulators and private participants). I cursed because it’s the same ignorant argument over and over spreading false information about how the market functions. Actual front running is illegal and companies would get shut down in a heart beat if they were doing it.

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.