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I work in HFT, so feel free to dismiss what I say as biased... There is this widespread perception that HFT traders are rent seekers, and bad for markets, and

• throwawayqqq11 3y ago
  You said * HTF provide liquidity. * HTF beeing invited into markets formerly excluding them. * Regulation attempts on HFT hit retail traiders too. * You disagree, that HTF is rent seeking? Imho, all those statements are weak. Providing liquidity in markets is essential but markets worked long before HFT was a thing. FTH is just another way of going "meta" (for VC?) simply beeing faster. Until they are the market. The big question, as you too said is. > It is still possible that changing market structure or regulation [...] could be somehow beneficial for markets or society as a whole, but this is far from obvious. To me, it is rent seeking. What would you reply to the scenario ofa strong FTH monopoly, which the tech sector is in hot pursuit of.
  • toth 3y ago
    > You said > * HTF provide liquidity. > * HTF beeing invited into markets formerly excluding them. > * Regulation attempts on HFT hit retail traiders too. > * You disagree, that HTF is rent seeking? > Imho, all those statements are weak. > Providing liquidity in markets is essential but markets worked long before HFT was a thing. Correct, but the previous incarnation of liquid providers (mostly humans on stock exchange floors) was far more expensive and less efficient than HFT. This is why HFT was able to compete on price of liquidity provision (i.e., the spreads came down) and win. These legacy firms did lose out from HFT (and are actually behind some of the anti HFT rhetoric out there) but I assume people in HFT see technological disruption as a good thing, even if bad for some incumbents. The idea that retail traders or institutional investors are the ones that lost out from HFT lacks any evidence, AFAIK. > FTH is just another way of going "meta" (for VC?) simply beeing faster. Until they are the market. Your wording is a bit unclear, but if you are hinting that HFTs are operating at a loss until they capture sufficient market share, this is demonstrably false. HFTs make a lot of money (you can look up Virtu's financial statements for proof since it is a public company). > The big question, as you too said is. > > It is still possible that changing market structure or regulation [...] could be somehow beneficial for markets or society as a whole, but this is far from obvious. > To me, it is rent seeking. It would be if it was true. I admit it's a theoretical possibility, but I am yet to see a convincing argument of it.
    • throwawayqqq11 3y ago
      > It would be [rent seeking] if it was true. I admit it's a theoretical possibility, but I am yet to see a convincing argument of it. As i see it, you already provided all aspects to label HFT as such. Except one: the physical foundation of running such a business. They provide faster and more cost efficient liquidity, thus "bringing down the spread" which will push out maybe not all but certainly the lesser privileged conventional traders. This is foremost negative for the effected traders and not per se for the public but as the pessimist that i am, i cannot help it but see it as just another way of market consolidation, of monopolization in the worst case. The only way to seriously compete with such HFTs, is to do it as they do, which requires the same physical accesses to the markets. Previously, the access to valuable (insider) information was a privilege for slow traders and a way to get an edge. Speed and algorithms are imo just a new privilege, enabled by technology. The simple reason why insider trading is illegal, because it puts other marketeers at a disadvantage, they have no means to compensate. The same is true for HFT. You cannot rent the rack next to the markets machines when its already occupied. What would you reply to such a statement: HFT is just front running but from the client side. But to be fair, i have to see convincing evidence for my pessimistic worst cases too.
      • toth 3y ago
        > They provide faster and more cost efficient liquidity, thus "bringing down the spread" which will push out maybe not all but certainly the lesser privileged conventional traders. This is foremost negative for the effected traders and not per se for the public but as the pessimist that i am, i cannot help it but see it as just another way of market consolidation, of monopolization in the worst case. They are only "pushing out" other liquidity providers. If you are a medium/long term investor you are not competing with HFTs. Yes, if you want to be day trader HFTs might make your life harder, but I think from society's point of view that's fine. > The only way to seriously compete with such HFTs, is to do it as they do, which requires the same physical accesses to the markets. Previously, the access to valuable (insider) information was a privilege for slow traders and a way to get an edge. Speed and algorithms are imo just a new privilege, enabled by technology. > The simple reason why insider trading is illegal, because it puts other marketeers at a disadvantage, they have no means to compensate. The same is true for HFT. You cannot rent the rack next to the markets machines when its already occupied. There is no principle that all market participants must been on equal footing. That would be impossible to enforce, and counterproductive to boot. If you are a slow (non HFT) trader at a big fund or bank you also have a lot of advantages over a guy doing it from home: better financing rates, more market access, a whole infrastructure to provide you with information and analysis, etc. Should that be made illegal as well? What about if you are just a better trader? Should you be somehow given a handicap so others can compete with you? As I said in another reply, in every field of human activity, professionals are advantaged over hobbyists, and that's fine.
• anigbrowl 3y ago
  HFT is not rent seeking, it is providing a valuable service (liquidity provision) Skkkkkritttttt 'Liquidity provision' is just 'fast cash for your distressed equities'. Yes, if prices are trending in an unfavorable direction investors/speculators would suffer a greater loss in a market without HFT as orders took minutes rather than seconds to clear. But you are indirectly collecting economic rents by trading so fast that retail investors can't connect with each other, they always end up connecting with the HFT. So in that sense you are collecting rent on the expensive high speed trading infrastructure by getting to the front of every queue. A brilliant/knowledgeable retail trader is unable to monetize their comparative advantage because they can't compete with the HFT operator on execution speeds. The whole thing is built on FOMO, and creates the illusion of value by endlessly accelerating transaction speeds. This is like arguing that people who drive way above the speed limit are creating value by arriving at their destination sooner (leaving more road space available) and encouraging others to drive fast (making the road transport system more efficient). Accidents that occur int he vicinity of speeding drivers' trajectory can be blamed on inferior driving standards. regulatory interventions aimed at reducing HFT [...] increase volatility and spreads and raise effective trading costs for retail traders Good. Volatility is opportunity for the smart and risk-tolerant, and trading costs are a good proxy for risk. This is how financial markets are supposed to work, offering the opportunity of a good payday for clever traders and discouraging the mediocre with excessively low or high risk tolerance before they can drag or blow up too much. Trading is meant to be a human activity that serves human needs. The more it is automated and accelerated, the more it tends toward monopolistic concentration of capital in corporate entities and increases overall fragility of the system.
  • toth 3y ago
    > 'Liquidity provision' is just 'fast cash for your distressed equities'. Yes, if prices are trending in an unfavorable direction investors/speculators would suffer a greater loss in a market without HFT as orders took minutes rather than seconds to clear. Liquidity provision is more than that. Without market makers/liquidity providers prices fluctuate a lot more because the balance of natural buyers/sellers varies over time. Liquidity provision is a shock absorber to those imbalances. > But you are indirectly collecting economic rents by trading so fast that retail investors can't connect with each other, they always end up connecting with the HFT. You are right that retail traders trade against HFTs most of the time. This is actually true for institutional investors as well, simply because HFTs provide almost all of the liquidity in stock market. I.e., it's not because HFT as are reacting to incoming orders faster (it is impossible to react to a marketable order before it trades by design), but because HFTs are the ones posting at the bid or ask. For retail traders there's the extra step that most (all?) retail brokers have agreements with HFTs where they send them their retail orders before they hit the markets. The HFTs can opt to trade against the retail trader but only if they give them a better price than they could have gotten at the exchanges. There is some unfounded misperception that this practice must be nefarious, based on the idea that the HFTs can only be doing this if they are pulling one over the retail traders. This is wrong, the reason HFTs like to trade against retail is that it is unlikely that a retail order is part of a large multi-million share meta-order that is going to push the price against the liquidity provider. This means that they can give retail traders lower spreads and still make money, both parties win. The party who loses in this are the institutional traders - since HFTs manage to segregate part of the retail flow, they end up using higher spreads for the rest of the flow. > So in that sense you are collecting rent on the expensive high speed trading infrastructure by getting to the front of every queue. This is stretching the definition of rent. If I own a well-run restaurant, am I collecting rent on expensive food preparation infrastructure that lets me prepare good food at a lower cost that my competitors? > A brilliant/knowledgeable retail trader is unable to monetize their comparative advantage because they can't compete with the HFT operator on execution speeds. They also have a hard time competing against traders working at big banks or hedge funds even if they don't use HFT infrastructure. In every field of human activity, professionals have big advantages over hobbyists, and that's fine. Also note that if you are a retail trader buying stocks with a long/medium term outlook HFT is good for you (lower trading costs!). If you want to be day trader, HFT might make your life harder, but it's not clear to me that's a bad thing. > The whole thing is built on FOMO, and creates the illusion of value by endlessly accelerating transaction speeds. Transaction speeds are not endlessly accelerated. There's a misapprehension that HFTs are trading in and out of positions in a millisecond time scale. That's absurd, you'd never make money that way. They care about their latency down to the microsecond or hundreds of nano-seconds because that lets them cancel orders quickly when it looks like the market is going to move against them and avoid adverse selection, the bane of the liquidity provider. > This is like arguing that people who drive way above the speed limit are creating value by arriving at their destination sooner (leaving more road space available) and encouraging others to drive fast (making the road transport system more efficient). Accidents that occur int he vicinity of speeding drivers' trajectory can be blamed on inferior driving standards. For the faster drivers, there is clear downside: the increased accidents. For HFT, what is that? > [...] The more it is automated and accelerated, the more it tends toward monopolistic concentration of capital in corporate entities and increases overall fragility of the system. HFT firms require very little capital compared to things like big banks or large hedge funds. I don't have the numbers but I am sure their combined capital is tiny fraction of the rest of players in financial markets. They don't hold large books ever, so if they go under, there is no fire sale that drives asset prices down and cause a crisis. They don't present a big systemic risk.