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> but overall it performs a valuable economic function Can you explain what that is? > To understand this requires understanding markets very deeply Apparent

• mrcode007 3y ago
  He’s referring to the fact that the HFT “provides liquidity” as in getting a share off your hands and flipping it to someone else that is not you a moment later. This way you didn’t have to wait 3 seconds or 1 minute or whatever to sell your shares because someone knew they could flip them (alpha) on a short notice so they participated in a transaction with you. He’s assuming that without the HFT, the transactions wouldn’t be as frequent and you’d have to either a) wait for the fill on your trade , or b) lower your ask price if selling under time deadline. Analogously for buy orders. The only parties with semi-global visibility are prime brokers by definition; they see every position of everyone who custodies with them. The parties with global visibility of the US market are TRF (trade reporting facility) and those are the only parties who can sort of evaluate the HFT claims without bias or vested interest. Most of the studies in the field have some sort of an angle or vested interest so it’s hard to evaluate the veracity of the claims one way or another. A counterpoint to HFT is that stock markets existed before the the advent of computers and they had runs, panics and blow ups just like regular markets do now.
  • alchemist1e9 3y ago
    I don’t have time to reply properly until a few hours from now. In the meantime what I can say very simply in the hope that someone else knowledgeable can contribute earlier. It’s simply an empirical fact that the costs of intermediation to the system are the lowest they have ever been. The US and other global electronic markets are incredibly efficient and deliver unmatched liquidity, information efficiency, and the lowest costs to the entire capital markets than at anytime in history. That march forward is continuous and brutally competitive There are many many way to see this and measure it, any serious quantitative analysis, by professionals, for instance trained in econometrics and with access to the raw data, like those at say the Fed, or those operating exchanges, as examples.
    • mrcode007 3y ago
      Your dismissals seem to be very biased and you’re not allowing the possibility of being wrong. As a practitioner who worked on the systems you’re citing I can tell you’re wrong on many fronts. As far as costs are concerned, you’re not answering the most relevant question that applies to most users of this forum: costs to retail traders, and are only tackling the institutional side of things. Nobody from retail concerns themselves with costs of intermediation because those costs are irrelevant to retail. Not at the order volumes that don’t even incur slippage. Plus, fees are only part of the game. I can give you an NBBO improvement now to be compliant with the regulation, but I am not guaranteeing anything in terms of price in the next second. See where this is going? Edit: by the way, what you’re repeating is what I jokingly call a “party line”. Especially if you look at the hard cold data. For example people often cite narrower spreads etc. but even with Interactive Brokers you can get MPID displayed on the NMS aggregated full depth order book and see who quotes how much and at what levels and the spreads don’t add up to the half of the myths people keep repeating. It’s easy to hide the real numbers in the _averages_ and various other statistics though.
      • alchemist1e9 3y ago
        I’m a practitioner and no, the costs to retail traders is included and analyzed. The most vocal critics of HFT are very often previously practitioners who are upset when their strategies and models becomes obsolete are are outwitted by even more efficient operators. Give any example of where you are going? I will say RegNMS and NBBO regulations are actually preventing even further efficiencies. Dark pools and off exchange matching or internalization are complex topic that are easy to misunderstand. There are absolutely bad actors to be found in the system. This is true in any system. But on aggregate the system is continuously reducing costs and improving efficiency. Intermediation costs are a friction on the real economy and capital markets and they will always exist, but on aggregate they are dropping for all users, institutional and retail. In regards to party line, it’s absurd, you can simply take the aggregate income, not profits, of all the top HFT operators, their income is their counterparties costs, and when attributed per market, this number is continuously dropping on aggregate. If you look at an individual firm, you can see it’s income growing, however that will come from 2 dimensions, either expanding their operations to other markets, or taking share from a competitor. However if you sum all profits across all HFT operators on a single market complex, say US equities, on longer economic timescales, this number is continuously dropping. Obviously during periods of market volatility this number can increase, but the trend over years, will be always downward. HFT is a absolutely brutally competitive industry. I’d be interested in what you saw working on such systems seem “wrong” or “unfair”. My guess is you don’t understand that all is fair in war and that includes HFT, as long as it is legal.