6 ms·

Am I wrong in saying that high-speed trading does nothing to make the world a better place, and simply sucks up hardware, infrastructure, and talent to enrich a

Am I wrong in saying that high-speed trading does nothing to make the world a better place, and simply sucks up hardware, infrastructure, and talent to enrich a handful of people? If not, how about a per-transaction tax on securities trades, one that wouldn't be out of line for individual investors, but would extract considerable funds from HSTs that could be used for things that will make the world a better place?

ivanjermakov 3y ago
How would you stop a broker, e.g. bank, that holds a high volume of securities and provides HST access for a fee smaller than the market itself?
t0mas88 3y ago
Not entirely "nothing", as a result of HFT market making all participants are getting smaller spreads and increased liquidity. However... That has huge diminishing returns. The first few steps to electronic markets and fast market makers dropped the spread considerably (making trading cheaper for everyone), all the steps that came after cost a lot more and didn't really improve things much. So they're not adding a lot now relative to the cost and complexity. But banning the whole practice will make the markets function much worse and more expensive for everyone.
- mrcode007 3y ago
  The only agent the spread matters to is the HFT and a market maker so it’s a circular reasoning. Similar for liquidity provision; most of the optimal control theory solutions for market making with alpha signal will widen the spread and remove liquidity the moment they sense something is off.
  - bryanlarsen 3y ago
    If I buy a stock and sell it three years later, my profit is reduced by the spread. If the spread is 5% that might be a significant portion of my profit.
    - mrcode007 3y ago
      You’ll trigger a circuit breaker before you get a spread of 5%
- bb88 3y ago
  So if a stock price crashes there's no one around to buy the stock, so HFT doesn't help in that scenario. They're not going to reduce the buy/ask spread. But if a stock is going up, HFT inserts themselves between the buyer and the seller and takes a small cut in the process. I don't see how it helps the liquidity stock, but seems to be more like an HFT tax. They didn't increase the number of stock shares, just got in between the buy/ask margin.
  - t0mas88 3y ago
    Going in between the buy/ask margin means the margin got smaller which is good for all traders in the market. There is no way to "go in between" and not make it smaller, because the best price gets the order. Here's a much deeper analysis on bid ask spread from HFT market making: https://www.cftc.gov/sites/default/files/2022-08/HFT_and_market_quality_ada.pdf https://www.cftc.gov/sites/default/files/2022-08/HFT_and_mar...
  - caddemon 3y ago
    Jane Street is not a huge player in HFT, they are primarily a liquidity provider and therefore actually do enable people to sell stocks during a crash. Any registered market maker has specific rules imposed by the exchange about always needing to provide a 2 sided offer within a reasonable bound of the current market.
lxgr 3y ago
It does seem like an incredible waste of resources of all kinds, but I'm not sure whether a tax would fix things. This is a problem of market structures, if I understand it correctly; facilitated largely by Reg NMI in the US and its equivalents globally. And it's not like all was well before that: Instead of HFTs, it was market makers or specialists pocketing impressive, largely risk-free profits. What you'd ideally want is to preserve the good that the HFTs facilitate (liquidity, more efficient price discovery, smaller spreads etc.) while avoiding the bad (siphoning off investors' money from the markets and math and physics PhDs from the world's top schools), but I haven't yet heard a convincing proposal for that.
- qznc 3y ago
  One proposal I heard was to make the market "tick slower". Accumulate orders for, e.g., a minute and then resolve them all at once (without favoring the early ones). This way a delay of a few seconds doesn't matter.
  - mrcode007 3y ago
    This is how options trade; with periodic auctions
    - JumpCrisscross 3y ago
      > how options trade; with periodic auctions Former options trader. This improves dealers’ profits. Consider a once-a-day auction. The person who puts in an order at 9:35AM incorporates five minutes’ information. The person who does so at 3:55PM, all but five minutes’. Anything material that happened at Noon is extracted from the early order and benefited to the late one. If the orders are unsealed, the later order can incorporate the early order’s existence. With options, that means the high-speed late order has better information about the underlying stock than the orders preceding it. So it generates risk-free profits from them.
      - stvltvs 3y ago
        What if the orders were sealed and the auction happened much more frequently, like every minute? It doesn't seem like late traders would get much of an advantage.
growse 3y ago
Yes. It was worse in the "good old days". The cost of trading was much higher and the people that felt that were the people who needed the market to make the world work (risk management, investment etc.) Markets make the world a better place (it's not a new idea), and more efficient markets are better than less efficient ones. > If not, how about a per-transaction tax on securities trades, one that wouldn't be out of line for individual investors, Why do you want my pension fund to spend more of my money on trading costs?
detourdog 3y ago
Trading is a self-fulfilling prophecy the more trades of anything that can be conjured up out of thin air is seen as a ripe market to the financial industry. HST turns what would have been a single trade into multiple trades making volume go up and to the right.
ls612 3y ago
Yes. Trading costs and high spread are inherently wasteful. Reducing both of those and increasing liquidity is an unalloyed good.
fxd123 3y ago
More taxes do not make the world a better place > per-transaction tax on securities trades This already exists anyway. I assume you just want to increase it?
SJC_Hacker 3y ago
It gives a bunch of people jobs that wouldn't otherwise have one
- lxgr 3y ago
  I've never understood why job creation would be considered something desirable in and of itself. Doesn't it make much more sense for a society as a whole to optimize for efficiency and then reallocate the now-redundant employees to tasks that actually need them? And even disregarding that, practically, the kind of people working in HFT usually have a skill sets that make them highly employable anywhere. If anything, HFT is draining some of the best mathematicians and software engineers from other projects that can't afford to pay as well.
  - SJC_Hacker 3y ago
    Who gets to define whats most efficient? And sadly, society grossly misallocates its resources when you think about whats right. Its more important that we live in huge/new houses and drive new cars and have nice vacations than fund to finding a cure for cancer, and people make this decision every day.
    - lxgr 3y ago
      If we have the option to make a human's job redundant through automation (without a disproportional reduction in quality), but choose not to because of "preserving jobs", that's inefficient. In my view, it's disingenuous and cynical towards the person doing the job: They're effectively historical actors in a museum because we haven't figured out how else to solve for the distribution of monetary and "soft" values like societal status, feeling like a productive member of society etc. There's nothing at all wrong in my view with letting people do what they want and cross-subsidizing that activity as a society, but why not call it what it is? And why stop at office-style work and exclude e.g. art?
lend000 3y ago
You could say the same thing about most HN users' software jobs, but then upon deeper inspection, you would realize: oh, there's a value here (however slight), which is why people are getting paid for it. Impacts of HFT on society: - You no longer have to pay a stockbroker $100 over the phone to take a position and hope they get you a decent price. Trading is instant and spreads are extremely tight. - Money they make is made by 1. offering you convenience (usually for an imperceptibly small fee built into the spread) or against people trying to do the exact same thing that they are (intraday trading). The intraday trading is a zero sum game, but the liquidity providing is net positive. The zero sum component only affects you if you're trying to profit from intra-day trading too, in which case, you're a hypocrite for calling them out. Amongst people who understand HFT well enough to realize it benefits them, but who hate it anyway, I think the vitriol specific to HFT is that it's a small club and they aren't part of it. Algo-trading jobs can pay significantly better than the best principal engineer jobs at FAANG (which can also be argued to be useless jobs), and those jobs are also much harder to land (think Rentech).

ivanjermakov 3y ago

How would you stop a broker, e.g. bank, that holds a high volume of securities and provides HST access for a fee smaller than the market itself?

t0mas88 3y ago

Not entirely "nothing", as a result of HFT market making all participants are getting smaller spreads and increased liquidity. However... That has huge diminishing returns. The first few steps to electronic markets and fast market makers dropped the spread considerably (making trading cheaper for everyone), all the steps that came after cost a lot more and didn't really improve things much. So they're not adding a lot now relative to the cost and complexity. But banning the whole practice will make the markets function much worse and more expensive for everyone.

mrcode007 3y ago
The only agent the spread matters to is the HFT and a market maker so it’s a circular reasoning. Similar for liquidity provision; most of the optimal control theory solutions for market making with alpha signal will widen the spread and remove liquidity the moment they sense something is off.
- bryanlarsen 3y ago
  If I buy a stock and sell it three years later, my profit is reduced by the spread. If the spread is 5% that might be a significant portion of my profit.
  - mrcode007 3y ago
    You’ll trigger a circuit breaker before you get a spread of 5%
bb88 3y ago
So if a stock price crashes there's no one around to buy the stock, so HFT doesn't help in that scenario. They're not going to reduce the buy/ask spread. But if a stock is going up, HFT inserts themselves between the buyer and the seller and takes a small cut in the process. I don't see how it helps the liquidity stock, but seems to be more like an HFT tax. They didn't increase the number of stock shares, just got in between the buy/ask margin.
- t0mas88 3y ago
  Going in between the buy/ask margin means the margin got smaller which is good for all traders in the market. There is no way to "go in between" and not make it smaller, because the best price gets the order. Here's a much deeper analysis on bid ask spread from HFT market making: https://www.cftc.gov/sites/default/files/2022-08/HFT_and_market_quality_ada.pdf https://www.cftc.gov/sites/default/files/2022-08/HFT_and_mar...
- caddemon 3y ago
  Jane Street is not a huge player in HFT, they are primarily a liquidity provider and therefore actually do enable people to sell stocks during a crash. Any registered market maker has specific rules imposed by the exchange about always needing to provide a 2 sided offer within a reasonable bound of the current market.

lxgr 3y ago

It does seem like an incredible waste of resources of all kinds, but I'm not sure whether a tax would fix things. This is a problem of market structures, if I understand it correctly; facilitated largely by Reg NMI in the US and its equivalents globally. And it's not like all was well before that: Instead of HFTs, it was market makers or specialists pocketing impressive, largely risk-free profits. What you'd ideally want is to preserve the good that the HFTs facilitate (liquidity, more efficient price discovery, smaller spreads etc.) while avoiding the bad (siphoning off investors' money from the markets and math and physics PhDs from the world's top schools), but I haven't yet heard a convincing proposal for that.

qznc 3y ago
One proposal I heard was to make the market "tick slower". Accumulate orders for, e.g., a minute and then resolve them all at once (without favoring the early ones). This way a delay of a few seconds doesn't matter.
- mrcode007 3y ago
  This is how options trade; with periodic auctions
  - JumpCrisscross 3y ago
    > how options trade; with periodic auctions Former options trader. This improves dealers’ profits. Consider a once-a-day auction. The person who puts in an order at 9:35AM incorporates five minutes’ information. The person who does so at 3:55PM, all but five minutes’. Anything material that happened at Noon is extracted from the early order and benefited to the late one. If the orders are unsealed, the later order can incorporate the early order’s existence. With options, that means the high-speed late order has better information about the underlying stock than the orders preceding it. So it generates risk-free profits from them.
    - stvltvs 3y ago
      What if the orders were sealed and the auction happened much more frequently, like every minute? It doesn't seem like late traders would get much of an advantage.

growse 3y ago

Yes. It was worse in the "good old days". The cost of trading was much higher and the people that felt that were the people who needed the market to make the world work (risk management, investment etc.) Markets make the world a better place (it's not a new idea), and more efficient markets are better than less efficient ones. > If not, how about a per-transaction tax on securities trades, one that wouldn't be out of line for individual investors, Why do you want my pension fund to spend more of my money on trading costs?

detourdog 3y ago

Trading is a self-fulfilling prophecy the more trades of anything that can be conjured up out of thin air is seen as a ripe market to the financial industry. HST turns what would have been a single trade into multiple trades making volume go up and to the right.

ls612 3y ago

Yes. Trading costs and high spread are inherently wasteful. Reducing both of those and increasing liquidity is an unalloyed good.

fxd123 3y ago

More taxes do not make the world a better place > per-transaction tax on securities trades This already exists anyway. I assume you just want to increase it?

SJC_Hacker 3y ago

It gives a bunch of people jobs that wouldn't otherwise have one

lxgr 3y ago
I've never understood why job creation would be considered something desirable in and of itself. Doesn't it make much more sense for a society as a whole to optimize for efficiency and then reallocate the now-redundant employees to tasks that actually need them? And even disregarding that, practically, the kind of people working in HFT usually have a skill sets that make them highly employable anywhere. If anything, HFT is draining some of the best mathematicians and software engineers from other projects that can't afford to pay as well.
- SJC_Hacker 3y ago
  Who gets to define whats most efficient? And sadly, society grossly misallocates its resources when you think about whats right. Its more important that we live in huge/new houses and drive new cars and have nice vacations than fund to finding a cure for cancer, and people make this decision every day.
  - lxgr 3y ago
    If we have the option to make a human's job redundant through automation (without a disproportional reduction in quality), but choose not to because of "preserving jobs", that's inefficient. In my view, it's disingenuous and cynical towards the person doing the job: They're effectively historical actors in a museum because we haven't figured out how else to solve for the distribution of monetary and "soft" values like societal status, feeling like a productive member of society etc. There's nothing at all wrong in my view with letting people do what they want and cross-subsidizing that activity as a society, but why not call it what it is? And why stop at office-style work and exclude e.g. art?

lend000 3y ago

You could say the same thing about most HN users' software jobs, but then upon deeper inspection, you would realize: oh, there's a value here (however slight), which is why people are getting paid for it. Impacts of HFT on society: - You no longer have to pay a stockbroker $100 over the phone to take a position and hope they get you a decent price. Trading is instant and spreads are extremely tight. - Money they make is made by 1. offering you convenience (usually for an imperceptibly small fee built into the spread) or against people trying to do the exact same thing that they are (intraday trading). The intraday trading is a zero sum game, but the liquidity providing is net positive. The zero sum component only affects you if you're trying to profit from intra-day trading too, in which case, you're a hypocrite for calling them out. Amongst people who understand HFT well enough to realize it benefits them, but who hate it anyway, I think the vitriol specific to HFT is that it's a small club and they aren't part of it. Algo-trading jobs can pay significantly better than the best principal engineer jobs at FAANG (which can also be argued to be useless jobs), and those jobs are also much harder to land (think Rentech).