15 ms·

Here's the thing though: ostensibly, financial markets aid in allocating capital for real world investment. Real world investment doesn't work on a millisecond

Here's the thing though: ostensibly, financial markets aid in allocating capital for real world investment. Real world investment doesn't work on a millisecond basis. It doesn't even work on a per-minute basis - at best, it works on a daily basis. So if we were talking about how the financial markets benefit the real economy, we would say that Alice wants to sell at price X on Tuesday, and Bob wants to buy at price Y on Tuesday. And in that case, the go-between is unnecessary. Nobody in the real economy needs instant order fulfillment when even regular bank transfers take a day to clear. I get that more frequent dealings can help with finding "right" prices. It certainly reduces the spread. The problem is that HFT makes market access unequal. You claim that Alice could have held out for $10.05 if she had wanted to. This is incorrect. Alice most likely does not have the infrastructure in place, and the fixed costs would be far too high for her to participate in that game. So in fact Eve did not provide any kind of useful service to Alice. Eve exploited unequal access to the market for her personal gain. From a libertarian perspective you may say that's fine, granted. But the argument that Eve provided a service to the real economy is not as clear as you make it seem. So there is a tradeoff there. HFT reduces spreads and perhaps helps price finding. However, for most market participants form the real economy, intra-day fluctuations dominate the spreads by orders of magnitude anyway, so reducing the spread isn't even that much of a useful service to the real economy - at least not to the extent it happens today. On the other hand, HFT makes access to the market unequal, limiting market competition. It seems unlikely to me that the current situation is a proper balance within this tradeoff.

yummyfajitas 15y ago
You claim that Alice could have held out for $10.05 if she had wanted to. This is incorrect. Unless the "5" key on her keyboard is broken, she could have typed 10.05 into eTrade instead of 10.00.
sseveran 15y ago
At the point of IPO the capital for a company has already typically been allocated. The financial markets allow the owners of a company to sell their shares to the public and realize profits on their prior investments. After that markets are about betting whether the price of the company will go up or down and people trade accordingly. The need to trade instantly is very important for risk mitigation. If unexpected news comes out today that a company is the target of an adverse event like a DOJ lawsuit many market participants will want to react as fast as possible to the news. Say it takes 30 seconds for the price to fall by $10. If you could trade at the 15 second mark you would only lose $5. To an investment firm (non Market Maker or other HFT) this can be crucially important and many firms have automated systems of their own to trade. A key point of the article that most people miss is that someone has always fulfilled the role that HFTs currently occupy. In the old days floor traders occupied this role as pointed out by the article. Floor trading was a club where you had to buy a seat to be allowed in. Depending on the market the cost of the seat might be hundreds of thousands of dollars. The traders controlled access to the markets and for some markets like Oil the only way to trade was through these floor traders. Now these floor traders took full advantage of this and kept the spreads on the instruments they traded much wider than they are today. In the early 90s you could easily pay $.20 per share to the market maker to get a fill on a liquid stock. The realization (as pointed out by the article) that computers could do this better and faster is just like any other industry. The people most hurt by this development were the floor traders themselves. There is a movie called The Pit that explores the effect that computerized trading had on floor traders in Chicago. Today if I want to trade MSFT the spread on BATS's BZX exchange was just $0.01. To me, another market participant I consider it to be much better to pay a penny to Getco rather than $.20 to a floor trader. The colocation business as it has evolved has made market access more equal, not less. Today anyone can pay to colocate a server at NASDAQ, NYSE, BATS, etc... I know longer have to buy a floor seat to be able to trade there. Now there are real market barriers to entry but they are not structural. Just as you can't go build a Google competitor given that you don't have all the historical search traffic data and the infrastructure to compete with them, HFT firms have made significant investments in infrastructure of their own. If you had sufficient capital for technology development you could compete with any other HFT firm. Yes there are people hurt by HFT, just like anything else when new players with greater efficiency emerge. However the average investor who is not competing with these firms is not harmed. The floor traders were, just like telephone operators before them.
- Rimpinths 15y ago
  Speaking as a software developer at one of the exchanges, I thought these comments were accurate and insightful. A lot of people think that colocation is inherently unfair, but they don't realize what a huge improvement this is over the old system of a limited number of floor traders. One slight correction: I think the movie about floor traders in Chicago is called "Floored". There is another another movie about floor traders in NY called "The Pit".
- nhaehnle 15y ago
  The need to trade instantly is very important for risk mitigation. If unexpected news comes out today that a company is the target of an adverse event like a DOJ lawsuit many market participants will want to react as fast as possible to the news. Say it takes 30 seconds for the price to fall by $10. If you could trade at the 15 second mark you would only lose $5. This type of risk mitigation is important to whom, exactly? When the type of unexpected news you mention comes in, somebody is going to take a hit, yes. Who should take that hit? What are the criteria according to which you make that decision in the first place? In the scenario you outline, say the price falls by $10, somebody is going to take that loss no matter what. Without rapid trade, the original holder of the paper is probably going to take the full loss. In your scenario with rapid trade, they found some "fool" who was prepared to buy the paper at an intermediate price, and so the original owner lost less. So from the perspective of the original owner that is certainly a benefit. But is it a benefit for society? That is an entirely different question. One could argue that the only reason they lost less is that they were faster in reacting to a certain piece of news, on a timescale of minutes, which is entirely irrelevant to the real economy. Your point about HFT replacing floor trading is a valid point, but all it really proves is that barriers to entry into the market must be low. There is nothing inherent requiring high frequency trading. The job could just as well be done by lower frequency algorithmic trading, with a matching algorithm that runs on e.g. a 5 minute heartbeat. Yes, the spreads are going to be bigger. Then again, intraday movements dominate spreads by orders of magnitude anyway, so from the perspective of the real economy, why should I care about how small the spreads are?
  - lifty 15y ago
andylei 15y ago
> financial markets aid in allocating capital for real world investment. this is only one purpose of financial markets. the other purpose is to transfer risk. any capital that you hold is subject to risks, and as a capital owner, you really only want to be subject to the risks that you know about and can compute well. you'd like to transfer other types of risk to other parties. > It doesn't even work on a per-minute basis - at best, it works on a daily basis is this a joke? if AAPL releases earnings at 10am and they come in 20 cents under expectations, i can guarantee you that regardless of the presence of computers, by 10:01am, AAPL is going to trade down a lot. > It certainly reduces the spread. The problem is that HFT makes market access unequal. lower spreads mean that less profitable strategies can survive in the marketplace. there will actually be more market participants in this type of scenario > You claim that Alice could have held out for $10.05 if she had wanted to. This is incorrect what you're describing here is a limit order, the most basic type of order that everyone has access to. she puts in 10.05 in etrade, and gets filled if the market moves up to 10.05 (but not if the market moves down towards 9.95 and does not come back up). > for most market participants form the real economy, intra-day fluctuations dominate the spreads by orders of magnitude anyway this is exactly why latency is important (and also contradicts your earlier statements). you want your orders filled now, before the market moves away from you.
lotharbot 15y ago
Real world grocery shopping happens on perhaps a bi-weekly basis. But I want to be able to check out soon after I get to the register; I don't want to have to wait for hours or days for a cashier to decide that they're ready to execute the other side of my purchase. Investment happens on a timescale of months or years. But when I make the decision to exchange one investment for another (I include "cash" as an investment) I want to be able to make that exchange rapidly. If someone wants to jump on my offer in mere milliseconds, I'll take it. Maybe I could've gotten a few more cents by waiting for an offer minutes or hours later, but that's not the game I'm playing. If I cared about those last few cents I'd price my asset a little higher and wait for a better deal. Since I don't think it's worth the wait, I'll let the HFT have those few cents for the convenience of letting me clear my trade immediately so I can move on with my day.
- nhaehnle 15y ago
  I see your point in theory, but in practice it doesn't seem to apply. Even regular bank transfers, i.e. transferring money from one checking account to another checking account, usually take a day to clear over here. I am talking about regular bank accounts in Germany, by the way. The economy manages to run just fine with this system. As long as something as basic and fundamental as simply moving money from point A to point B is that slow, I really don't buy the argument that the real economy needs transactions on financial markets to clear that quickly. What's the point of having a trade clear in milliseconds if it takes me a day to transfer the money to a different account?
  - yummyfajitas 15y ago
    Trades don't clear in milliseconds. Trades are agreed to in milliseconds, just as bank transfers are. I.e., once you push the "make transfer" button, the wheels are in motion, it just takes a day for the money to actually move. The same applies to equities - once the trade is made, the wheels are in motion. But actually transferring the securities takes up to 3 days.
    - lotharbot 15y ago
white_devil 15y ago
You're fighting a losing battle. These people are personally involved in HFT or the financial industry in general, so naturally they'll try to justify what they're doing with whatever distraction-bullshit they happen to think of. Sure, I can't know this, but it's a safe assumption. Whatever. Feel free to downvote and flag my post to bury it again, HN. Stay classy. The army of PhDs from elite schools working for the financial industry are too smart not to realize that it's full of shit. How could they not see the relentless greed, and the sociopath douchebags in charge for what they are? They'll be aware of bad/immoral/illegal things being done all around them, but hey, the salaries in finance are pretty fucking ridiculous and they get to work on challenging problems. http://www.zerohedge.com/news/high-frequency-minutes-hft-explained-6-short-video-clips http://www.zerohedge.com/news/high-frequency-minutes-hft-exp... Just like you said, in the real world, someone trading in the real economy does not make trades thousands of times per second. And I bet HFT bringing spreads down to $0.05 doesn't help anyone without a HFT machinery of their own. But here they are, on Hacker News, bullshitting/distracting us convincingly time and time again.
- ChristianMarks 15y ago
  One thing that hasn't been mentioned is the practice of placing a large block order and then canceling it milliseconds later to take advantage of the price movement this causes. So placing a large order does not automatically create liquidity--it can create the momentary illusion of it. (This observation has to be pompously dismissed in gratuitously insulting terms--professional rational discourse will not suffice to explain indefensible practice. I must have touched a nerve.)

yummyfajitas 15y ago

You claim that Alice could have held out for $10.05 if she had wanted to. This is incorrect. Unless the "5" key on her keyboard is broken, she could have typed 10.05 into eTrade instead of 10.00.

sseveran 15y ago

At the point of IPO the capital for a company has already typically been allocated. The financial markets allow the owners of a company to sell their shares to the public and realize profits on their prior investments. After that markets are about betting whether the price of the company will go up or down and people trade accordingly. The need to trade instantly is very important for risk mitigation. If unexpected news comes out today that a company is the target of an adverse event like a DOJ lawsuit many market participants will want to react as fast as possible to the news. Say it takes 30 seconds for the price to fall by $10. If you could trade at the 15 second mark you would only lose $5. To an investment firm (non Market Maker or other HFT) this can be crucially important and many firms have automated systems of their own to trade. A key point of the article that most people miss is that someone has always fulfilled the role that HFTs currently occupy. In the old days floor traders occupied this role as pointed out by the article. Floor trading was a club where you had to buy a seat to be allowed in. Depending on the market the cost of the seat might be hundreds of thousands of dollars. The traders controlled access to the markets and for some markets like Oil the only way to trade was through these floor traders. Now these floor traders took full advantage of this and kept the spreads on the instruments they traded much wider than they are today. In the early 90s you could easily pay $.20 per share to the market maker to get a fill on a liquid stock. The realization (as pointed out by the article) that computers could do this better and faster is just like any other industry. The people most hurt by this development were the floor traders themselves. There is a movie called The Pit that explores the effect that computerized trading had on floor traders in Chicago. Today if I want to trade MSFT the spread on BATS's BZX exchange was just $0.01. To me, another market participant I consider it to be much better to pay a penny to Getco rather than $.20 to a floor trader. The colocation business as it has evolved has made market access more equal, not less. Today anyone can pay to colocate a server at NASDAQ, NYSE, BATS, etc... I know longer have to buy a floor seat to be able to trade there. Now there are real market barriers to entry but they are not structural. Just as you can't go build a Google competitor given that you don't have all the historical search traffic data and the infrastructure to compete with them, HFT firms have made significant investments in infrastructure of their own. If you had sufficient capital for technology development you could compete with any other HFT firm. Yes there are people hurt by HFT, just like anything else when new players with greater efficiency emerge. However the average investor who is not competing with these firms is not harmed. The floor traders were, just like telephone operators before them.

Rimpinths 15y ago
Speaking as a software developer at one of the exchanges, I thought these comments were accurate and insightful. A lot of people think that colocation is inherently unfair, but they don't realize what a huge improvement this is over the old system of a limited number of floor traders. One slight correction: I think the movie about floor traders in Chicago is called "Floored". There is another another movie about floor traders in NY called "The Pit".
nhaehnle 15y ago
The need to trade instantly is very important for risk mitigation. If unexpected news comes out today that a company is the target of an adverse event like a DOJ lawsuit many market participants will want to react as fast as possible to the news. Say it takes 30 seconds for the price to fall by $10. If you could trade at the 15 second mark you would only lose $5. This type of risk mitigation is important to whom, exactly? When the type of unexpected news you mention comes in, somebody is going to take a hit, yes. Who should take that hit? What are the criteria according to which you make that decision in the first place? In the scenario you outline, say the price falls by $10, somebody is going to take that loss no matter what. Without rapid trade, the original holder of the paper is probably going to take the full loss. In your scenario with rapid trade, they found some "fool" who was prepared to buy the paper at an intermediate price, and so the original owner lost less. So from the perspective of the original owner that is certainly a benefit. But is it a benefit for society? That is an entirely different question. One could argue that the only reason they lost less is that they were faster in reacting to a certain piece of news, on a timescale of minutes, which is entirely irrelevant to the real economy. Your point about HFT replacing floor trading is a valid point, but all it really proves is that barriers to entry into the market must be low. There is nothing inherent requiring high frequency trading. The job could just as well be done by lower frequency algorithmic trading, with a matching algorithm that runs on e.g. a 5 minute heartbeat. Yes, the spreads are going to be bigger. Then again, intraday movements dominate spreads by orders of magnitude anyway, so from the perspective of the real economy, why should I care about how small the spreads are?
- lifty 15y ago

andylei 15y ago

> financial markets aid in allocating capital for real world investment. this is only one purpose of financial markets. the other purpose is to transfer risk. any capital that you hold is subject to risks, and as a capital owner, you really only want to be subject to the risks that you know about and can compute well. you'd like to transfer other types of risk to other parties. > It doesn't even work on a per-minute basis - at best, it works on a daily basis is this a joke? if AAPL releases earnings at 10am and they come in 20 cents under expectations, i can guarantee you that regardless of the presence of computers, by 10:01am, AAPL is going to trade down a lot. > It certainly reduces the spread. The problem is that HFT makes market access unequal. lower spreads mean that less profitable strategies can survive in the marketplace. there will actually be more market participants in this type of scenario > You claim that Alice could have held out for $10.05 if she had wanted to. This is incorrect what you're describing here is a limit order, the most basic type of order that everyone has access to. she puts in 10.05 in etrade, and gets filled if the market moves up to 10.05 (but not if the market moves down towards 9.95 and does not come back up). > for most market participants form the real economy, intra-day fluctuations dominate the spreads by orders of magnitude anyway this is exactly why latency is important (and also contradicts your earlier statements). you want your orders filled now, before the market moves away from you.

lotharbot 15y ago

Real world grocery shopping happens on perhaps a bi-weekly basis. But I want to be able to check out soon after I get to the register; I don't want to have to wait for hours or days for a cashier to decide that they're ready to execute the other side of my purchase. Investment happens on a timescale of months or years. But when I make the decision to exchange one investment for another (I include "cash" as an investment) I want to be able to make that exchange rapidly. If someone wants to jump on my offer in mere milliseconds, I'll take it. Maybe I could've gotten a few more cents by waiting for an offer minutes or hours later, but that's not the game I'm playing. If I cared about those last few cents I'd price my asset a little higher and wait for a better deal. Since I don't think it's worth the wait, I'll let the HFT have those few cents for the convenience of letting me clear my trade immediately so I can move on with my day.

nhaehnle 15y ago
I see your point in theory, but in practice it doesn't seem to apply. Even regular bank transfers, i.e. transferring money from one checking account to another checking account, usually take a day to clear over here. I am talking about regular bank accounts in Germany, by the way. The economy manages to run just fine with this system. As long as something as basic and fundamental as simply moving money from point A to point B is that slow, I really don't buy the argument that the real economy needs transactions on financial markets to clear that quickly. What's the point of having a trade clear in milliseconds if it takes me a day to transfer the money to a different account?
- yummyfajitas 15y ago
  Trades don't clear in milliseconds. Trades are agreed to in milliseconds, just as bank transfers are. I.e., once you push the "make transfer" button, the wheels are in motion, it just takes a day for the money to actually move. The same applies to equities - once the trade is made, the wheels are in motion. But actually transferring the securities takes up to 3 days.
  - lotharbot 15y ago

white_devil 15y ago

You're fighting a losing battle. These people are personally involved in HFT or the financial industry in general, so naturally they'll try to justify what they're doing with whatever distraction-bullshit they happen to think of. Sure, I can't know this, but it's a safe assumption. Whatever. Feel free to downvote and flag my post to bury it again, HN. Stay classy. The army of PhDs from elite schools working for the financial industry are too smart not to realize that it's full of shit. How could they not see the relentless greed, and the sociopath douchebags in charge for what they are? They'll be aware of bad/immoral/illegal things being done all around them, but hey, the salaries in finance are pretty fucking ridiculous and they get to work on challenging problems. http://www.zerohedge.com/news/high-frequency-minutes-hft-explained-6-short-video-clips http://www.zerohedge.com/news/high-frequency-minutes-hft-exp... Just like you said, in the real world, someone trading in the real economy does not make trades thousands of times per second. And I bet HFT bringing spreads down to $0.05 doesn't help anyone without a HFT machinery of their own. But here they are, on Hacker News, bullshitting/distracting us convincingly time and time again.

ChristianMarks 15y ago
One thing that hasn't been mentioned is the practice of placing a large block order and then canceling it milliseconds later to take advantage of the price movement this causes. So placing a large order does not automatically create liquidity--it can create the momentary illusion of it. (This observation has to be pompously dismissed in gratuitously insulting terms--professional rational discourse will not suffice to explain indefensible practice. I must have touched a nerve.)