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Is there any good reason for high-frequency trading to exist? People often complain about bitcoin wasting energy, but oddly this gets a free pass despite this b

• arcimpulse 2y ago
  It would be trivial (and vastly more equitable) to quantize trade times.
  • FredPret 2y ago
    You mean like settling trades every 0.25 seconds or something like that? Wouldn't there be a queue of trades piling up every 0.25 seconds, incentivizing maximum speed anyway?
    • foobazgt 2y ago
      Usually the proposal is to randomize the processing of the queue. So, as long as your trades get in during the window, there's no advantage to getting in any earlier. In theory the window is so small as to not have any impact on liquidity but wide enough to basically shut down all HFT.
      • affyboi 2y ago
        How would that work? Would you randomly select a single order posted, go by market participant (like randomly select some entities that posted a trade in this window), and would you allow prices to move during this window?
• FredPret 2y ago
  Non-bitcoin transactions are just a couple of entries in various databases. Mining bitcoin is intense number crunching. HFT makes the financial markets a tiny bit more accurate by resolving inconsistencies (for example three pairs of currencies can get out of whack with one another) and obvious mispricings (for various definitions of "obvious")
  • jeffbee 2y ago
    That's a nice fairy tale that they probably tell their kids when asked, but what the profitable firms are doing at the cutting edge is inducing responses in the other guys' robots, in a phase that the antagonist controls, then trading against what they know is about to happen. It is literally market manipulation. A way to kill off this entire field of endeavor is to charge a tax on cancelled orders.
    • blakers95 2y ago
      Yep and what's worse is many hft firms aren't in the market-making business at all but actually REMOVE liquidity.
      • FredPret 2y ago
        What's the mechanism for removing liquidity?
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        • itchyouch 2y ago
          Adding liquidity means to place an order that sits on the book while removing liquidity means to execute against an order that's already resting on the book.
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        • cheonic730 2y ago
          > What's the mechanism for removing liquidity? Liquidity removal = market order Liquidity providing = limit order (not immediately executable)
• torlok 2y ago
  To go a step further, I don't think you should be required to talk to middlemen when buying stocks, yet here we are. The house wants its cut.
  • astromaniak 2y ago
    Under the carpet deals would make it less transparent. It would be hard to detect that top manager sold all his stock to competitors and now is making decisions in their favor.
  • smabie 2y ago
    So who would sell it to you then? At any given time there's not very many actual natural buyer and sellers for a single security.
  • mrbald 2y ago
    Central counterparty concept implemented by most exchanges is a valid service, as otherwise counterparty risk management would be a nightmare - an example of a useful “middleman”.
    • immibis 2y ago
      Yes, but you and I can't even talk to the exchange. We have to talk to one of many brokers that are allowed to talk to the exchange, and brokers do much more than just passing your orders to exchanges. For example, IIRC they can legally front-run your orders.
      • idohft 2y ago
        What exactly do you mean when you say this: > IIRC they can legally front-run your orders. I doubt this is true, but there are definitions attached to front-running.
        • immibis 2y ago
          What I was actually thinking about was the infamous Payment for Order Flow, where your broker doesn't actually send your orders to an exchange, but gets paid to send them to a giant HFT firm which can do whatever it wants with no oversight, including using the information that you are about to place an order to inform their algorithms which may result in them putting out a similar order before yours.
• bravura 2y ago
  Warren Buffett proposed that the stock market should be open less frequently, like once a quarter or similar. This would encourage long-term investing rather than reacting to speculation. Regardless, there are no natural events that necessitate high-frequency trading. The underlying value of things rarely changes very quickly, and if it does it's not volatile, rather it's a firm transiton.
  • musicale 2y ago
    The value of a stock usually doesn't change every millisecond. There doesn't seem to be a huge public need to pick winners and losers based on ping time.
  • astromaniak 2y ago
    > Warren Buffett proposed that the stock market should be open less frequently This will result in another market where deals will be made and then finalized on that 'official' when it opens. It's like with employee stock. You can sell it before you can...
    • munk-a 2y ago
      Not if we disallow it. We have laws in place to try and prevent a lot of natural actions of markets.
      • FredPret 2y ago
        Instant biggest black market of all time, corruption skyrockets, only the richest people get fair deals on investments.
        • akira2501 2y ago
          They'll get better than fair deals. They will almost exclusively own all the available pricing information.
    • FooBarBizBazz 2y ago
• idohft 2y ago
  How far have you tried to tell, and do you buy/sell stocks? There's someone on the other side of your trade when you want to trade something. You're more likely than not choosing to interact with an HFT player at your price. If you're getting a better price, that's money that you get to keep. *I'm going to disagree on "free pass" also. HFT is pretty often criticized here.
• jeffreyrogers 2y ago
  Bid/ask spreads are far narrower than they were previously. If you look at the profits of the HFT industry as a whole they aren't that large (low billions) and their dollar volume is in the trillions. Hard to argue that the industry is wildly prosocial but making spreads narrower does mean less money goes to middlemen.
  • sesuximo 2y ago
    Why do high spreads mean more money for middlemen?
    • Arnt 2y ago
      When you buy stock, you generally by it from a "market maker", which is a middleman. When you sell, you sell to a market maker. Their business is to let you buy and sell when you want instead of waiting for a buyer/seller to show up. The spread is their profit source.
      • sesuximo 2y ago
        Wouldn’t the price movement overwhelm the spread if you sell more than a few days after you buy? I guess if spreads were huge it would matter more
        • Arnt 2y ago
          The price movement does indeed overwhelm the spread. Half the time it goes up, half the time down.
          • Maxatar 2y ago
            >Half the time it goes up, half the time down. This is not true and in fact when I hire quants or developers, I have to spend a surprising amount of time even teaching people with PhD's in statistics that the random nature of the stock market does not mean that it's a coin toss. It's surprising the number of people who should know better think trading is just about being right 51% of the time, or that typically stocks have a 50/50 chance of going up or down at any given moment... What's closer to the truth is that stocks are actually quite predictable the overwhelming majority of the time, but a single mistake can end up costing you dearly. You can be right 95% of the time, and then lose everything you ever made in the remaining 5% of the time. A stock might go up 10 times in a row, and then on the 11th trial, it wipes out everything it made and then some.
• pi-rat 2y ago
  Generally gets attributed with: - Increased liquidity. Ensures there's actually something to be traded available globally, and swiftly moves it to places where it's lacking. - Tighter spreads, the difference between you buying and then selling again is lower. Which often is good for the "actual users" of the market. - Global prices / less geographical differences in prices. Generally you can trust you get the right price no matter what venue you trade at, as any arbitrage opportunity has likely already been executed on. - etc..
  • munk-a 2y ago
    > Tighter spreads, the difference between you buying and then selling again is lower. Which often is good for the "actual users" of the market. I just wanted to highlight this one in particular - the spread is tighter because HFTs eat the spread and reduce the error that market players can benefit from. The spread is disappearing because of rent-seeking from the HFTs.
    • yxhuvud 2y ago
      What needs to be pointed out is that the rent and spread is the same thing in this equation. Before the rise of HFT actual people performed these functions, and then the spread/rent-seeking was a lot higher.
• mkoubaa 2y ago
  Why does it exist? Because it's legal and profitable. If you don't like it, try to convince regulators that it shouldn't be legal and provide a framework for criminalizing/fining it without unintended consequences, and then find a way to pay regulators more in bribes than the HFT shops do, even though their pockets are deeper than yours, and then things may change. If that sounds impossible, that's another answer to your question
• rcxdude 2y ago
  Yes: it put a much larger, more expensive, and less efficient part of wall street out of business. Before it was done with computers, it was done with lots of people doing the same job. What was that job? Well, if you want to go to a market and sell something, you generally would like for there to be someone there who's buying it. But it's not always the case that there's a buyer there right at the time who actually wants the item for their own use. The inverse is also true for a prospective buyer. Enter middle-men or market makers who just hang around the marketplace, learning roughly how much people will buy or sell a given good for, and buy it for slightly less than they can sell it later for. This is actually generally useful if you just want to buy or sell something. Now, does this need to get towards milli-seconds or nano-seconds? No, this is just the equivalent of many of these middle-men racing to give you an offer. But it's (part of) how they compete with each other, and as they do so they squeeze the margins of the industry as a whole: In fact the profits of HFT firms have decreased as a percentage of the overall market and in absolute terms after the initial peak as they displaced the day traders doing the same thing.
  • bostik 2y ago
    > it's not always the case that there's a buyer there right at the time This hits the nail on the head. For a trade to happen, counterparties need to meet in price and in time. A market place is useless if there is nobody around to buy or sell at the same time you do. The core service market makers provide is not liquidity. It's immediacy: they offer (put up) liquidity in order to capture trades, but the value proposition for other traders - and the exchanges! - is that there is someone to take the other side of a trade when a non-MM entity wants to buy or sell instruments. It took me a long time to understand what the difference is. And in order to make sure that there is sufficient liquidity in place, exchanges set up both contractual requirements and incentive structures for their market makers.
• calibas 2y ago
  A net negative to society, but a positive for the wealthiest.
  • cheonic730 2y ago
    > A net negative to society, but a positive for the wealthiest. No. When your passive index fund manager rebalances every month because “NVDA is now overweighted in VTI, QQQ” the manager does not care about the bid/ask spread. When VTI is $1.6 trillion, even a $0.01 difference in price translates to a loss $60 million for the passive 401k, IRA, investors. HFT reduces the bid/ask spread, and “gives this $60 million back” to the passive investors for every $0.01 price difference, every month. Note that VTI mid price at time of writing is $272.49.
• lmm 2y ago
  > a definite net negative to society as far as I can tell. What did you examine to reach that conclusion? If high-frequency trading were positive for society, what would you expect to be different? The reason for high-frequency trading to exist is that the sub-penny rule makes it illegal to compete on price so you have to compete on speed instead. Abolishing the sub-penny rule would mean high-frequency trading profits got competed-away to nothing, although frankly they're already pretty close. The whole industry is basically an irrelevant piece of plumbing anyway.
• TheAlchemist 2y ago
  Because it's not explicitly forbidden ? I would argue that HFT is a rather small space, albeit pretty concentrated. It's several orders of magnitude smaller in terms of energy wasting than Bitcoin. The only positive from HFT is liquidity and tighter spreads, but it also depends what people put into HFT definition. For example, Robinhood and free trading, probably wouldn't exist without it. They are taking a part of the cake that previously went to brokers and banks. HFT is not in a business of screwing 'the little guy'. From my perspective there is little to none negative to the society. If somebody is investing long term in the stock market, he couldn't care less about HFT.
  • musicale 2y ago
    Buying and quickly selling a stock requires a buyer and a seller, so it doesn't seem like an intrinsic property that real liquidity would be increased. Moreover, fast automated trading seems likely to increase volatility. I tend to agree that for long term investment it probably doesn't make a huge difference except for possible cumulative effects of decreased liquidity, increased volatility, flash crashes, etc. Also possibly a loss of small investor confidence since the game seems even more rigged in a way that they cannot compete with.
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• lifeformed 2y ago
  Just from an energy perspective, I'm pretty sure HFT uses many orders of magnitude less energy than bitcoin mining.