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I was going to mention HFT. How is it a level playing field when they are in the picture? Paying top dollar just to be closer and closer to the exchanges to g

I was going to mention HFT. How is it a level playing field when they are in the picture? Paying top dollar just to be closer and closer to the exchanges to get the fastest, "best price", when really, they have info before anyone else. Also, what about dark pools? Contrary to my username, which I just get a kick out of, I don't actually work on wall street or anything, but I've always felt the stock market was rigged for the elite. I think it is very likely that they have info before normal retail investors have any idea.

amznthrwaway 5y ago
HFT provides a value-adding service to retail. They replaced market-makers (who provided liquidity with huge spreads) with algos that have incredibly small spreads. Dark pools aren’t pernicious either, it’s just another place you can buy or sell things, and then immediately have the trade reported with the rest of the sales data. Not materially different from the dozens of other places to buy and sell.
traceroute66 5y ago
> I was going to mention HFT. How is it a level playing field when they are in the picture? Paying top dollar just to be closer and closer to the exchanges to get the fastest, "best price", when really, they have info before anyone else. Apologies if my post implied insider knowledge on the part of HFTs. That's not the case. The point I was making is their model is ONLY viable if they have the best mathematical brains, the best computing power, the best connectivity. If anything in that fragile chain is broken then their model is unviable. In the end, they trade on what is best described as noise. They look for patterns in the noise. And so they need "the best" noise, as soon as instantly as they can get it, and the computing power to process it as close to instantly as possible. I called it "another story" because its a truly nuts way of making money. ;-) There is an old saying. "Time in a trade is better than timing a trade". HFTs are basically trying to do the latter all day, every day. In my view, John Doe the buy & hold investor actually has the advantage that they can wait for weeks, months or years. Tortoise & Hare and all that ....
carnitine 5y ago
HFT is the best thing to ever happen to the average Joe retail investor. They have increased liquidity and price discovery dramatically at a fraction of the cost of the people they replaced.
- w4llstr33t 5y ago
  At what cost are they providing this service though? They make a ridiculous amount of money doing so. Shouldn't the exchanges have offered the best price, and provided liquidity, in the first place? Flash Boys: A Wall Street Revolt by Michael Lewis painted HFT in a pretty bad way. I have read criticisms of the book, but it's hard to separate out bias from the criticism. There's also all the heat on Robinhood about selling order flow, which I'm surprised was even news to regular investors. It's great they eliminated fees for normal trades, and I also understand most major brokerages sell order flow as well (and still charged for trades for a long time). I read that Fidelity is the only major player that doesn't sell order flow. Do you have some sources that someone could learn more about this, ones that don't have a vested interest in painting it in a positive way? Also, I'm still wondering, considering dark pools [1], and the inside information that would come along with that, since those trades wouldn't hit public markets, how the stock markets can be considered a fair place to trade? [1] https://www.investopedia.com/articles/markets/050614/introduction-dark-pools.asp https://www.investopedia.com/articles/markets/050614/introdu...
  - eu90h 5y ago
    I'd like to recommend the book "trading at the speed of light". It's an in depth look at the world of high frequency trading based on first hand interviews with traders, court documents, etc. It would appear based on what little information is actually available that HFT firms net only modest profits after taxes and fees on trades. Historically, it appears most firms fail to turn a profit and shut down. A paper of Laughlin (2014) suggests virtu, a hft firm that now executes Robinhood orders, earns an estimate profit of 0.24 cents per trade, with 0.05 to 0.1 cents per share traded being a respectable profit. I highly recommend this book though if your into this topic
Galanwe 5y ago
> Paying top dollar just to be closer and closer to the exchanges to get the fastest, "best price" Being able to send an order with a smaller latency does not magically get you a "better price". 99.9999% of the market participants couldn't care less if their orders arrived 1ms or 1m after they send it. Hell, most hedge funds trade on a _daily_ basis, with multiple days of expected returns predictions, and are more concerned with the transaction cost than the latency, thus opting for a very slow "market close price" execution algo. Those interested with very low latency are not hedge funds but market makers, and the kind of microstructure signals they exploit is not only orthogonal to what a retail investor would do, but often brings in just bips per trade, meaning the leverage required to make it worth it is anyway out of the retail league. > I think it is very likely that they have info before normal retail investors have any idea. What is a normal retail investor? Obviously hedge funds are going to be faster to react to e.g. earnings events than you. That doesn't mean this information is not public. It's just that HF pay data providers, invest in automatic data processing and decision making, etc. But normal retail investors don't trade on events, they trade for the long term. For the simple reason that they don't want to hit refresh every second on the web page publishing earnings calls of each stock they want to buy. > what about dark pools? Yes, what about them? The name triggers the imagination of people but there's really nothing fancy about it. The objective of dark pools is to allow the exchange of shares without too much of a movement in the orderbook. This is actually good for both users of dark pool (they get lower slippage) and users of the public market (it prevents artificial big swings in price due to large buyouts, which would be announced anyway). The liquidity at time T in the order book is not tailored to absorb any ridiculous amount that a large investor could be willing to exchange. > Shouldn't the exchanges have offered the best price, and provided liquidity, in the first place? What does that even mean? The exchanges don't offer price by themselves, they just reflect what participants are willing to pay or receive. They are just middlemen facilitating the exchange of goods by publishing the order book of who's willing to buy/sell and at which price. The exchanges also cannot magically provide liquidity out of thin air. Liquidity means there is someone real on the other end of your trade that is willing to buy or sell to you. Exchanges cannot create that artificially. What exchanges do, though, is offer rebates to providers of liquidity (including the market makers that you seem to despise) in exchange for the liquidity they provide. This is not a random decision by the exchange, it's because providing liquidity to the market is beneficial for everyone. As an investor, it means I won't have to worry that I will not be able to sell my shares whenever I want to. It also means that the spread will be tighter, thus lowering my slippage. And subsequently, it also means arbitrage is most likely in place, so I'm not being scammed just because I didn't check the price on 5 different platforms.

amznthrwaway 5y ago

HFT provides a value-adding service to retail. They replaced market-makers (who provided liquidity with huge spreads) with algos that have incredibly small spreads. Dark pools aren’t pernicious either, it’s just another place you can buy or sell things, and then immediately have the trade reported with the rest of the sales data. Not materially different from the dozens of other places to buy and sell.

traceroute66 5y ago

> I was going to mention HFT. How is it a level playing field when they are in the picture? Paying top dollar just to be closer and closer to the exchanges to get the fastest, "best price", when really, they have info before anyone else. Apologies if my post implied insider knowledge on the part of HFTs. That's not the case. The point I was making is their model is ONLY viable if they have the best mathematical brains, the best computing power, the best connectivity. If anything in that fragile chain is broken then their model is unviable. In the end, they trade on what is best described as noise. They look for patterns in the noise. And so they need "the best" noise, as soon as instantly as they can get it, and the computing power to process it as close to instantly as possible. I called it "another story" because its a truly nuts way of making money. ;-) There is an old saying. "Time in a trade is better than timing a trade". HFTs are basically trying to do the latter all day, every day. In my view, John Doe the buy & hold investor actually has the advantage that they can wait for weeks, months or years. Tortoise & Hare and all that ....

carnitine 5y ago

HFT is the best thing to ever happen to the average Joe retail investor. They have increased liquidity and price discovery dramatically at a fraction of the cost of the people they replaced.

w4llstr33t 5y ago
At what cost are they providing this service though? They make a ridiculous amount of money doing so. Shouldn't the exchanges have offered the best price, and provided liquidity, in the first place? Flash Boys: A Wall Street Revolt by Michael Lewis painted HFT in a pretty bad way. I have read criticisms of the book, but it's hard to separate out bias from the criticism. There's also all the heat on Robinhood about selling order flow, which I'm surprised was even news to regular investors. It's great they eliminated fees for normal trades, and I also understand most major brokerages sell order flow as well (and still charged for trades for a long time). I read that Fidelity is the only major player that doesn't sell order flow. Do you have some sources that someone could learn more about this, ones that don't have a vested interest in painting it in a positive way? Also, I'm still wondering, considering dark pools [1], and the inside information that would come along with that, since those trades wouldn't hit public markets, how the stock markets can be considered a fair place to trade? [1] https://www.investopedia.com/articles/markets/050614/introduction-dark-pools.asp https://www.investopedia.com/articles/markets/050614/introdu...
- eu90h 5y ago
  I'd like to recommend the book "trading at the speed of light". It's an in depth look at the world of high frequency trading based on first hand interviews with traders, court documents, etc. It would appear based on what little information is actually available that HFT firms net only modest profits after taxes and fees on trades. Historically, it appears most firms fail to turn a profit and shut down. A paper of Laughlin (2014) suggests virtu, a hft firm that now executes Robinhood orders, earns an estimate profit of 0.24 cents per trade, with 0.05 to 0.1 cents per share traded being a respectable profit. I highly recommend this book though if your into this topic

Galanwe 5y ago

> Paying top dollar just to be closer and closer to the exchanges to get the fastest, "best price" Being able to send an order with a smaller latency does not magically get you a "better price". 99.9999% of the market participants couldn't care less if their orders arrived 1ms or 1m after they send it. Hell, most hedge funds trade on a _daily_ basis, with multiple days of expected returns predictions, and are more concerned with the transaction cost than the latency, thus opting for a very slow "market close price" execution algo. Those interested with very low latency are not hedge funds but market makers, and the kind of microstructure signals they exploit is not only orthogonal to what a retail investor would do, but often brings in just bips per trade, meaning the leverage required to make it worth it is anyway out of the retail league. > I think it is very likely that they have info before normal retail investors have any idea. What is a normal retail investor? Obviously hedge funds are going to be faster to react to e.g. earnings events than you. That doesn't mean this information is not public. It's just that HF pay data providers, invest in automatic data processing and decision making, etc. But normal retail investors don't trade on events, they trade for the long term. For the simple reason that they don't want to hit refresh every second on the web page publishing earnings calls of each stock they want to buy. > what about dark pools? Yes, what about them? The name triggers the imagination of people but there's really nothing fancy about it. The objective of dark pools is to allow the exchange of shares without too much of a movement in the orderbook. This is actually good for both users of dark pool (they get lower slippage) and users of the public market (it prevents artificial big swings in price due to large buyouts, which would be announced anyway). The liquidity at time T in the order book is not tailored to absorb any ridiculous amount that a large investor could be willing to exchange. > Shouldn't the exchanges have offered the best price, and provided liquidity, in the first place? What does that even mean? The exchanges don't offer price by themselves, they just reflect what participants are willing to pay or receive. They are just middlemen facilitating the exchange of goods by publishing the order book of who's willing to buy/sell and at which price. The exchanges also cannot magically provide liquidity out of thin air. Liquidity means there is someone real on the other end of your trade that is willing to buy or sell to you. Exchanges cannot create that artificially. What exchanges do, though, is offer rebates to providers of liquidity (including the market makers that you seem to despise) in exchange for the liquidity they provide. This is not a random decision by the exchange, it's because providing liquidity to the market is beneficial for everyone. As an investor, it means I won't have to worry that I will not be able to sell my shares whenever I want to. It also means that the spread will be tighter, thus lowering my slippage. And subsequently, it also means arbitrage is most likely in place, so I'm not being scammed just because I didn't check the price on 5 different platforms.