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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 bet

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.
    - matthewdgreen 6y ago
      Again, this is exactly the behavior I mentioned in the above post. When the general public raises the important question of how much extractive behavior there is in HFT and asks whether the benefits outweigh the value lost by disadvantaged parties, they get brushed off and told that they’re ignorant. Your response focuses on one specific technical allegation while casually admitting that yeah, maybe there’s another type of extractive behavior that happens but “don’t you know the difference between one technical definition of extractive behavior and another?” At the same time no actual answer is given to the core question — presumably the assumption being that unless you are in the HFT world you’re not qualified to have the question answered, even if it affects you and you’re paying for it.
hervature 6y ago
Speed and frontrunning are not equivalent. Frontrunning is an illegal practice. Here is an article from FINRA stating as much [0]. Of course, people are always looking for ways to accomplish this. Hell, sometimes the exchanges try to sell it as a feature [1]. Again, no one debates that these types of practices should be banned and penalized (they already are). I'm not inside "the industry" so I don't know if there are some firms that make profit from illicit means by abusing bugs and/or other loopholes where speed matters. However, speed is always an advantage when there are multiple exchanges that sell inter-related products. The same reason why computers are used instead of telephones. You mention that HFT firms are willing to invest to beat other HFT firms gives the game away. We are both in agreement here but come to different conclusions. The arbitrage "algorithm" is simple in most cases. Futures contracts being sold in Chicago are at odds with equity prices in NYC. The first one to correct them wins. Speed is the only thing that matters. How exactly is people competing in the race "give the game away"? [0] - https://www.finra.org/investors/insights/getting-speed-high-frequency-trading https://www.finra.org/investors/insights/getting-speed-high-... [1] - https://www.sec.gov/news/press-release/2012-2012-189htm https://www.sec.gov/news/press-release/2012-2012-189htm

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.
  - matthewdgreen 6y ago
    Again, this is exactly the behavior I mentioned in the above post. When the general public raises the important question of how much extractive behavior there is in HFT and asks whether the benefits outweigh the value lost by disadvantaged parties, they get brushed off and told that they’re ignorant. Your response focuses on one specific technical allegation while casually admitting that yeah, maybe there’s another type of extractive behavior that happens but “don’t you know the difference between one technical definition of extractive behavior and another?” At the same time no actual answer is given to the core question — presumably the assumption being that unless you are in the HFT world you’re not qualified to have the question answered, even if it affects you and you’re paying for it.

hervature 6y ago

Speed and frontrunning are not equivalent. Frontrunning is an illegal practice. Here is an article from FINRA stating as much [0]. Of course, people are always looking for ways to accomplish this. Hell, sometimes the exchanges try to sell it as a feature [1]. Again, no one debates that these types of practices should be banned and penalized (they already are). I'm not inside "the industry" so I don't know if there are some firms that make profit from illicit means by abusing bugs and/or other loopholes where speed matters. However, speed is always an advantage when there are multiple exchanges that sell inter-related products. The same reason why computers are used instead of telephones. You mention that HFT firms are willing to invest to beat other HFT firms gives the game away. We are both in agreement here but come to different conclusions. The arbitrage "algorithm" is simple in most cases. Futures contracts being sold in Chicago are at odds with equity prices in NYC. The first one to correct them wins. Speed is the only thing that matters. How exactly is people competing in the race "give the game away"? [0] - https://www.finra.org/investors/insights/getting-speed-high-frequency-trading https://www.finra.org/investors/insights/getting-speed-high-... [1] - https://www.sec.gov/news/press-release/2012-2012-189htm https://www.sec.gov/news/press-release/2012-2012-189htm