6 ms·

The way I see it, HFT firms provide liquidity to the market, which is good. They do so in an automatic fasion which makes it cheaper than the past system of hum

by im3w1l 5y ago

The way I see it, HFT firms provide liquidity to the market, which is good. They do so in an automatic fasion which makes it cheaper than the past system of human traders. But they also do a speed competition which is mostly wasteful. There may be some benefit for the overall market of faster communications but it is pretty low. All systems have waste, some more and some less. This is unavoidable. So the discussion might be more productive if it was framed like this: Which system provides more benefits with less waste? Would frequent batch auctions lead to less resources being spent on wasteful racing, and more resources performing useful services for other market particpants? Or if we zoom out even more, the two main purposes of the market is allocating capital efficiently to businesses, and redistributing money from the working population to retired people (401k, IRA). And we can ask which market structure will make it better at these tasks? Framed like this it becomes natural to look at the other side of equation. Instead of asking which structure would screw over HFT's the most, we can ask which structure would be most convinient for say index funds or other mutural funds. And which structure would be most convinient for the individual stock picker. We could even start to ask which structure would help HFT's provide more liquidity with less risk.

Retric 5y ago
Swap to an auction batch model and they don’t provide liquidity, they simply don’t have significant stakes relative to the number of daily transactions. Essentially their an outgrowth of all trades needing to be instantaneous which lets them reuse the same capital thousands of times per day. Add to that the fact HFT are profitable and they must therefore provide negative economic value. Either the seller or the buyer is failing to capture value.
- fighterpilot 5y ago
  Nonsense. Trade can be positive sum in utility to both parties. One party making profits doesn't imply anything about how utility is changing on the other side of the trade. If you buy an iPhone, Apple have gotten richer but you have also gained something (utility). Your understanding of HFT is wrong as well. It's not all low latency arbitrage. It's also execution finesse, risk management and ML-heavy. HFT firms will still be extremely active under this new market structure.
  - Retric 5y ago
    High turnover rates are part of the definition of high frequency trading. If your holding positions for 30 minutes your not doing HFT. Ultimate buyers and sellers aren’t gaining anything on the timescales we are talking about.
    - fighterpilot 5y ago
      I don't know why you're bringing this up because it's not relevant, and nor is it accurate. You can have high turnover rates in batch auction strategy as well as a continuous trading strategy, this market structure change won't change that. And you can have a HFT strat with low turnover, e.g in a large tick name that barely moves where you might get five latency sensitive trades per day.
      - Retric 5y ago
        Latency sensitivity and Alo trading isn’t the same thing as HFT. “Very short time-frames for establishing and liquidating positions.” strait from the SEC: https://www.sec.gov/marketstructure/research/hft_lit_review_march_2014.pdf https://www.sec.gov/marketstructure/research/hft_lit_review_... Now it’s true an individual stock may only see 5 trades per day from a HFT algo, but theirs more than just one stock. The larger pool of money sitting around waiting for those 5 trades the lower your ROI. So, the obvious strategy is to reuse the same pool of money to back multiple different strategies.
        fighterpilot 5y ago
        A HFT that's trading bond futures may only have a handful of trades per day and hold for a long time because it's hard to liquidate effectively. Sometimes they just range all day. Anyway my point is that it's wrong to think that HFT are going out of business with this change because it's a fundamental misunderstanding of HFT. There's almost always an ML component and always an execution component and these two skills are going to be critical to profiting off the new market structure. Citadel, Jump, Tower, you name it. I promise you they will be all over this new structure.
- twic 5y ago
  The idea is that HFTs provide value by tightening spreads. The slower a market maker is, the more risk they take on when they quote, because they are more likely to be caught by market moves - less likely to cancel their quote when the market starts moving, less likely to be able to hedge if they get filled at the start of a move. To make up for that risk, they have to earn more per trade. The only way to do that is to quote a wider spread [1]. That means that real money participants end up paying more when they cross that spread. The value captured by HFTs has not come from real money participants, but from other, slower, market makers, and they have shared that value with real money participants. [1] Or to demand a bigger stipend, or steeper maker-taker pricing, from the exchange, either of which means bigger fees for other participants.
  - caethan 5y ago
    But lots of stocks have their spread limited by the subpenny rule, in which case additional HFT in that market is completely socially useless.
HWR_14 5y ago
How do HFTs add valuable liquidity to the market? Does the 500ns faster transaction time for a block of AMZN matter to literally anyone? Other than the two sides of the trade who lost some money to the HFT who MITM'd them.
- harryh 5y ago
  When someone buys liquidity, they don't do so to close their order 500ns faster. They do it to ensure they can trade at the current market price because they don't want to take the risk that the market will move away from them while waiting for a counter-party to trade with. Those that are comfortable taking this risk can simply issue a LIMIT order instead of a MARKET order.
  - HWR_14 5y ago
    So your contention is that HFTs make prices more stable? That they somehow assume risk and that justifies their profits. How would that work? I thought HFTers only got involved in between two parties when they knew they could make a profit. That's why HFTs don't have days when they lose money.
    - harryh 5y ago
      I thought HFTers only got involved in between two parties when they knew they could make a profit. You thought wrong. While there are a variety of things that HFT firms do, most of it is market making. https://en.wikipedia.org/wiki/Market_maker https://en.wikipedia.org/wiki/Market_maker
      - HWR_14 5y ago
        Those market makers are known, formal and regulated. HFTs are none of those. Well, I guess semi-regulated.
        harryh 5y ago
        The big HFT firms are, in fact, well known. https://medium.com/automation-generation/15-well-known-high-frequency-trading-firms-f45292c56d05 https://medium.com/automation-generation/15-well-known-high-... They're also regulated in various ways.

by im3w1l 5y ago

Retric 5y ago

Swap to an auction batch model and they don’t provide liquidity, they simply don’t have significant stakes relative to the number of daily transactions. Essentially their an outgrowth of all trades needing to be instantaneous which lets them reuse the same capital thousands of times per day. Add to that the fact HFT are profitable and they must therefore provide negative economic value. Either the seller or the buyer is failing to capture value.

fighterpilot 5y ago
Nonsense. Trade can be positive sum in utility to both parties. One party making profits doesn't imply anything about how utility is changing on the other side of the trade. If you buy an iPhone, Apple have gotten richer but you have also gained something (utility). Your understanding of HFT is wrong as well. It's not all low latency arbitrage. It's also execution finesse, risk management and ML-heavy. HFT firms will still be extremely active under this new market structure.
- Retric 5y ago
  High turnover rates are part of the definition of high frequency trading. If your holding positions for 30 minutes your not doing HFT. Ultimate buyers and sellers aren’t gaining anything on the timescales we are talking about.
  - fighterpilot 5y ago
    I don't know why you're bringing this up because it's not relevant, and nor is it accurate. You can have high turnover rates in batch auction strategy as well as a continuous trading strategy, this market structure change won't change that. And you can have a HFT strat with low turnover, e.g in a large tick name that barely moves where you might get five latency sensitive trades per day.
    - Retric 5y ago
      Latency sensitivity and Alo trading isn’t the same thing as HFT. “Very short time-frames for establishing and liquidating positions.” strait from the SEC: https://www.sec.gov/marketstructure/research/hft_lit_review_march_2014.pdf https://www.sec.gov/marketstructure/research/hft_lit_review_... Now it’s true an individual stock may only see 5 trades per day from a HFT algo, but theirs more than just one stock. The larger pool of money sitting around waiting for those 5 trades the lower your ROI. So, the obvious strategy is to reuse the same pool of money to back multiple different strategies.
      - fighterpilot 5y ago
        A HFT that's trading bond futures may only have a handful of trades per day and hold for a long time because it's hard to liquidate effectively. Sometimes they just range all day. Anyway my point is that it's wrong to think that HFT are going out of business with this change because it's a fundamental misunderstanding of HFT. There's almost always an ML component and always an execution component and these two skills are going to be critical to profiting off the new market structure. Citadel, Jump, Tower, you name it. I promise you they will be all over this new structure.
twic 5y ago
The idea is that HFTs provide value by tightening spreads. The slower a market maker is, the more risk they take on when they quote, because they are more likely to be caught by market moves - less likely to cancel their quote when the market starts moving, less likely to be able to hedge if they get filled at the start of a move. To make up for that risk, they have to earn more per trade. The only way to do that is to quote a wider spread [1]. That means that real money participants end up paying more when they cross that spread. The value captured by HFTs has not come from real money participants, but from other, slower, market makers, and they have shared that value with real money participants. [1] Or to demand a bigger stipend, or steeper maker-taker pricing, from the exchange, either of which means bigger fees for other participants.
- caethan 5y ago
  But lots of stocks have their spread limited by the subpenny rule, in which case additional HFT in that market is completely socially useless.

HWR_14 5y ago

How do HFTs add valuable liquidity to the market? Does the 500ns faster transaction time for a block of AMZN matter to literally anyone? Other than the two sides of the trade who lost some money to the HFT who MITM'd them.

harryh 5y ago
When someone buys liquidity, they don't do so to close their order 500ns faster. They do it to ensure they can trade at the current market price because they don't want to take the risk that the market will move away from them while waiting for a counter-party to trade with. Those that are comfortable taking this risk can simply issue a LIMIT order instead of a MARKET order.
- HWR_14 5y ago
  So your contention is that HFTs make prices more stable? That they somehow assume risk and that justifies their profits. How would that work? I thought HFTers only got involved in between two parties when they knew they could make a profit. That's why HFTs don't have days when they lose money.
  - harryh 5y ago
    I thought HFTers only got involved in between two parties when they knew they could make a profit. You thought wrong. While there are a variety of things that HFT firms do, most of it is market making. https://en.wikipedia.org/wiki/Market_maker https://en.wikipedia.org/wiki/Market_maker
    - HWR_14 5y ago
      Those market makers are known, formal and regulated. HFTs are none of those. Well, I guess semi-regulated.
      - harryh 5y ago
        The big HFT firms are, in fact, well known. https://medium.com/automation-generation/15-well-known-high-frequency-trading-firms-f45292c56d05 https://medium.com/automation-generation/15-well-known-high-... They're also regulated in various ways.