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It's a bit unfair to call it pointless. Empirical studies have shown that HFT increase liquidity in markets, leading to narrowed spreads, market depth, faster e

It's a bit unfair to call it pointless. Empirical studies have shown that HFT increase liquidity in markets, leading to narrowed spreads, market depth, faster execution speeds, cross-market informational efficiency, etc. All of these are generally beneficial to other non-HFT market participants. Now you might counter that it also brings some negatives (e.g. fleeting liquidity, market manipulation risk, etc.) and there's certainty some validity to that. But none of this supports an argument that it's pointless. More generally, activities aren't pointless if you are earning money from it which pays your rent, puts food on your table, etc. A large portion of the world works mainly for this goal. It's perfectly valid to tell your grandchildren "I spent my life making sure we'd have enough money for you and your parents to live comfortably", and we shouldn't look down on someone who does that.

amelius 1y ago
> Also, it's not pointless to the person actually engaging in HFT if they are making money from it. Activities aren't pointless if they pay your rent, put food on your table, etc. You have to look at the bigger picture. HFT companies only increase the barrier to entry to participate in the market. This means that while you may be able to put food on the table, you make it more difficult for other people to put food on the table.
- jbstack 1y ago
  How's that? HFT lowers the barrier of entry for ordinary participants who just want to invest their savings either directly or through something like a pension fund, because they get all those benefits I mentioned, and those benefits are useful when you are only executing a trade once a month or year. It only increases the barrier to entry to people who want to do HFT themselves on a smaller scale, because they now can't compete on latency etc. But it's a bit of a circular argument to say that it's a bad thing that engaging in HFT increases the barrier of entry to HFT. In any case, and to reiterate, I wasn't refuting a claim that HFT is a bad thing, I was refuting your original claim that it's pointless. For something to be pointless, there has to be no purpose to it whatsoever, which means it has to have no benefits.
  - amelius 1y ago
    We all know that middlemen are bad. We don't need an HFT middleman.
    - gricardo99 1y ago
      actually you do need another participant to take the other side of your trade. That’s not a middle man. Market makers, liquidity providers, are a key component of these markets, taking risk with their own capital (no systemic risk, no too big to fail, going to get a government is things go badly), requiring sophistication and specialization to survive in an ultra competitive environment with a high degree of uncertainty and risk exposure.
    - jkman 1y ago
      How is HFT a middle man? We're not talking about things like market makers in this discussion
- OneDeuxTriSeiGo 1y ago
  Markets should not primarily be a casino. If you want to invest some of your income into a spread of companies? Go for it. But if all you are doing is trying to game the market? That's just gambling, go to a real casino and have some fun instead. HFT should be driven by these types of market makers exactly for the purpose of decreasing the amount of unnecessary speculation and volatility in the markets. HFTs killing the spreads is one of the only reasons the markets didn't implode during covid despite the extraordinary fear and volatility that was impacting them. You want a parasite? Look to hedge funds who just sit on piles of other people's cash to scoop obscene amounts off the top (relative to their actual contribution) for occassionally shuffling funds between financial instruments.
  - amelius 1y ago
    > HFTs killing the spreads is one of the only reasons the markets didn't implode during covid despite the extraordinary fear and volatility that was impacting them. And why would this not be possible if everybody traded at the same, low, frequency? Alternatively, what is the minimum trading frequency required to save markets from collapsing? By trying to answer these questions you see how ridiculous the situation with HFT really is.
    - Galanwe 1y ago
      Sorry but I don't understand any of your arguments. You are throwing things like "HFT increase the barrier to entry", "HFT make things unfair", but... how so? What would _you_ do if you had the capability to trade at the speed of light while others cannot? Trading faster does not magically make money appear in your account, it does not magically tell you what is going up and what is going down. It seems people work under the assumption that HFTs make money by having the same ideas than others, but trading it faster. That is _not_ what market making is, that is _not_ what HFTs do, and trading 10ns "faster" is of absolutely no use to 99.99% of market participants. In fact, the vast majority of market participants purposefully *slow* their signals to avoid impacting the market. At any given point in time, the orderbook contains but a tiny fraction of the liquidity that most people are willing to trade. HFTs usually run on a combination of 4 businesses, none of which provide any downside for the rest of the participants: Market making, events signals, order flow and arbitrage. Market making: essentially they are paid (or more precisely, rebated) to "animate" the market (provide liquidity). Everyone is happier with tight spreads, and everyone is happier with some level of liquidity at the top of the book, I don't really see how that could be up to debate. This is a tough business, the market maker has to provide a contractual amount of inventory for buyers and sellers at the same time, with the risk that these assets can inadvertently increase or decrease in value. Market makers get a premium (the spread) in exchange for providing liquidity to market takers, taking the risk of holding that inventory for them. Order flow: HFTs are usually more knowledgeable than managers (and even brokers) to perform trade execution. Remember, the price of an asset does not move "by itself". What makes the price of an asset _really_ increase is an imbalance between the size of buys and sells, causing the spread to be crossed increasingly in one direction, and eating higher and higher price levels => a market participant buying shares is self realizing the price increase. That is called market impact, and that is something nobody wants. In an ideal world, nobody would know the actual liquidity that other participants are willing to exchange on the market, that way no arbitrage would be possible, no market impact, everyone is happy. The problem though is that you need _some_ level of visibility otherwise you hinder so called "price discovery", and regulators don't like that because it's an open door for scams, hidden fees, etc. So a lot of investors just delegate the actual order passing to HFTs: you agree on a price you're happy with, and the HFT executes the orders for you. If they manage to get a better price: good for them, they can pocket the difference. If they didn't, they will have to eat the cost and do better next time. Again, it's a _difficult job_, because by very definition managers are going to try to give you _toxic flows_: if someone mandates you to buy 100 shares of Microsoft, it's because they think the price will go up, but you will quote them at the current stock price. I don't think anyone is negatively impacted by that business to be honest. I am quite happy to instantly do a trade at a known price and let an HFT take the risk of executing trades, finding liquidity, etc. Arbitrage: This may be the most well known HFT strategy. Essentially benefiting from price disparity of more or less fungible assets. So if HSBC is priced the equivalent of $100 on the LSE and $101 on NYSE, they buy there and sell here. I don't think there is much debate on whether that's a good thing or not, everyone should be happy that prices are more or less consistent around the world. Most people also wouldn't want to bear the overnight nor settlement/FX risk of holding these. Event signals: I guess that's what people overreact to, even though this is but a tiny and negligible part of the HFT businesses. There are strategies where the whole concept is just to be the first to react to some kind of event, and yes HFTs are the best placed to do such strategies. The thing is, this is not a very lucrative business for a simple reason, which I already stated before: at any point in time, the orderbook contains but a mere fraction of the available liquidity. And it takes *ample time* for the market impact of a trade to be absorbed. There are a lot of papers on the subject, but without entering in too much details: the bigger your order, the longer it will take for the book to absorb it and liquidity to come back. For most hedge funds doing statistical arbitrage, CTAs, etc, we are talking multiple *days*. So realistically, if you're in the business of reacting the fastest to some kind of news or event, there's really not much more you can do than cross the spread and eat one or two levels of the book. Even for the most liquid of US stocks, that's a couple hundred thousands dollar per trade on average, for a tiny return difference versus executing a couple of seconds later, so I hope you find a lot of these if you plan on getting rich. TLDR, I think 99% of HFT hate is completely unjustified. They provide a legitimate service to most market participants, and as an investor I wouldn't want to do their job, nor would I think that they hinder in any way my investments, on the contrary.
- rcxdude 1y ago
  If you're a normal market participant, HFT companies mainly make it harder for someone else to take more money off of the top of your underlying transaction (and you are, in general, going to be paying someone for that). HFT almost completely replaced hoards of the stereotypical wall street traders and I don't really see many people shedding tears for them.
Retric 1y ago
> HFT increases liquidity On average with a few caveats yes, but it also causes issues by reducing the vastly more important signaling aspects of the market. Trade volume for example can get almost completely divorced from economic reality.
gosub100 1y ago
It's pointless in terms of the skill wasted that could be used for actual cool things. But I agree that more market participants is better. And whether I'm buying or selling, I always want someone to trade with, vs not.

amelius 1y ago

> Also, it's not pointless to the person actually engaging in HFT if they are making money from it. Activities aren't pointless if they pay your rent, put food on your table, etc. You have to look at the bigger picture. HFT companies only increase the barrier to entry to participate in the market. This means that while you may be able to put food on the table, you make it more difficult for other people to put food on the table.

jbstack 1y ago
How's that? HFT lowers the barrier of entry for ordinary participants who just want to invest their savings either directly or through something like a pension fund, because they get all those benefits I mentioned, and those benefits are useful when you are only executing a trade once a month or year. It only increases the barrier to entry to people who want to do HFT themselves on a smaller scale, because they now can't compete on latency etc. But it's a bit of a circular argument to say that it's a bad thing that engaging in HFT increases the barrier of entry to HFT. In any case, and to reiterate, I wasn't refuting a claim that HFT is a bad thing, I was refuting your original claim that it's pointless. For something to be pointless, there has to be no purpose to it whatsoever, which means it has to have no benefits.
- amelius 1y ago
  We all know that middlemen are bad. We don't need an HFT middleman.
  - gricardo99 1y ago
    actually you do need another participant to take the other side of your trade. That’s not a middle man. Market makers, liquidity providers, are a key component of these markets, taking risk with their own capital (no systemic risk, no too big to fail, going to get a government is things go badly), requiring sophistication and specialization to survive in an ultra competitive environment with a high degree of uncertainty and risk exposure.
  - jkman 1y ago
    How is HFT a middle man? We're not talking about things like market makers in this discussion
OneDeuxTriSeiGo 1y ago
Markets should not primarily be a casino. If you want to invest some of your income into a spread of companies? Go for it. But if all you are doing is trying to game the market? That's just gambling, go to a real casino and have some fun instead. HFT should be driven by these types of market makers exactly for the purpose of decreasing the amount of unnecessary speculation and volatility in the markets. HFTs killing the spreads is one of the only reasons the markets didn't implode during covid despite the extraordinary fear and volatility that was impacting them. You want a parasite? Look to hedge funds who just sit on piles of other people's cash to scoop obscene amounts off the top (relative to their actual contribution) for occassionally shuffling funds between financial instruments.
- amelius 1y ago
  > HFTs killing the spreads is one of the only reasons the markets didn't implode during covid despite the extraordinary fear and volatility that was impacting them. And why would this not be possible if everybody traded at the same, low, frequency? Alternatively, what is the minimum trading frequency required to save markets from collapsing? By trying to answer these questions you see how ridiculous the situation with HFT really is.
  - Galanwe 1y ago
    Sorry but I don't understand any of your arguments. You are throwing things like "HFT increase the barrier to entry", "HFT make things unfair", but... how so? What would _you_ do if you had the capability to trade at the speed of light while others cannot? Trading faster does not magically make money appear in your account, it does not magically tell you what is going up and what is going down. It seems people work under the assumption that HFTs make money by having the same ideas than others, but trading it faster. That is _not_ what market making is, that is _not_ what HFTs do, and trading 10ns "faster" is of absolutely no use to 99.99% of market participants. In fact, the vast majority of market participants purposefully *slow* their signals to avoid impacting the market. At any given point in time, the orderbook contains but a tiny fraction of the liquidity that most people are willing to trade. HFTs usually run on a combination of 4 businesses, none of which provide any downside for the rest of the participants: Market making, events signals, order flow and arbitrage. Market making: essentially they are paid (or more precisely, rebated) to "animate" the market (provide liquidity). Everyone is happier with tight spreads, and everyone is happier with some level of liquidity at the top of the book, I don't really see how that could be up to debate. This is a tough business, the market maker has to provide a contractual amount of inventory for buyers and sellers at the same time, with the risk that these assets can inadvertently increase or decrease in value. Market makers get a premium (the spread) in exchange for providing liquidity to market takers, taking the risk of holding that inventory for them. Order flow: HFTs are usually more knowledgeable than managers (and even brokers) to perform trade execution. Remember, the price of an asset does not move "by itself". What makes the price of an asset _really_ increase is an imbalance between the size of buys and sells, causing the spread to be crossed increasingly in one direction, and eating higher and higher price levels => a market participant buying shares is self realizing the price increase. That is called market impact, and that is something nobody wants. In an ideal world, nobody would know the actual liquidity that other participants are willing to exchange on the market, that way no arbitrage would be possible, no market impact, everyone is happy. The problem though is that you need _some_ level of visibility otherwise you hinder so called "price discovery", and regulators don't like that because it's an open door for scams, hidden fees, etc. So a lot of investors just delegate the actual order passing to HFTs: you agree on a price you're happy with, and the HFT executes the orders for you. If they manage to get a better price: good for them, they can pocket the difference. If they didn't, they will have to eat the cost and do better next time. Again, it's a _difficult job_, because by very definition managers are going to try to give you _toxic flows_: if someone mandates you to buy 100 shares of Microsoft, it's because they think the price will go up, but you will quote them at the current stock price. I don't think anyone is negatively impacted by that business to be honest. I am quite happy to instantly do a trade at a known price and let an HFT take the risk of executing trades, finding liquidity, etc. Arbitrage: This may be the most well known HFT strategy. Essentially benefiting from price disparity of more or less fungible assets. So if HSBC is priced the equivalent of $100 on the LSE and $101 on NYSE, they buy there and sell here. I don't think there is much debate on whether that's a good thing or not, everyone should be happy that prices are more or less consistent around the world. Most people also wouldn't want to bear the overnight nor settlement/FX risk of holding these. Event signals: I guess that's what people overreact to, even though this is but a tiny and negligible part of the HFT businesses. There are strategies where the whole concept is just to be the first to react to some kind of event, and yes HFTs are the best placed to do such strategies. The thing is, this is not a very lucrative business for a simple reason, which I already stated before: at any point in time, the orderbook contains but a mere fraction of the available liquidity. And it takes *ample time* for the market impact of a trade to be absorbed. There are a lot of papers on the subject, but without entering in too much details: the bigger your order, the longer it will take for the book to absorb it and liquidity to come back. For most hedge funds doing statistical arbitrage, CTAs, etc, we are talking multiple *days*. So realistically, if you're in the business of reacting the fastest to some kind of news or event, there's really not much more you can do than cross the spread and eat one or two levels of the book. Even for the most liquid of US stocks, that's a couple hundred thousands dollar per trade on average, for a tiny return difference versus executing a couple of seconds later, so I hope you find a lot of these if you plan on getting rich. TLDR, I think 99% of HFT hate is completely unjustified. They provide a legitimate service to most market participants, and as an investor I wouldn't want to do their job, nor would I think that they hinder in any way my investments, on the contrary.
rcxdude 1y ago
If you're a normal market participant, HFT companies mainly make it harder for someone else to take more money off of the top of your underlying transaction (and you are, in general, going to be paying someone for that). HFT almost completely replaced hoards of the stereotypical wall street traders and I don't really see many people shedding tears for them.

Retric 1y ago

> HFT increases liquidity On average with a few caveats yes, but it also causes issues by reducing the vastly more important signaling aspects of the market. Trade volume for example can get almost completely divorced from economic reality.

gosub100 1y ago

It's pointless in terms of the skill wasted that could be used for actual cool things. But I agree that more market participants is better. And whether I'm buying or selling, I always want someone to trade with, vs not.