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This article is long on inflammatory language and short on analysis or evidence. There are plenty of real issues with HFT as currently practiced (front-running

This article is long on inflammatory language and short on analysis or evidence. There are plenty of real issues with HFT as currently practiced (front-running data feeds, gaming with flickering orders, dark pools, etc). However, the article ignores these real issues and suggests that liquidity itself is a bad thing (or something not worth having). Liquidity means having the ability to transfer an asset quickly with minimal loss of value. Anyone who invests wants a liquid market -- illiquid securities are notoriously problematic. The article is misleading. It is the absence of liquidity that is a disaster. Market crashes are what happens when liquidity dries up. Just ask anyone who was trying to sell their house last year. As long as the rules are fair (no front-running, preferential trades, equal access, etc), every market participant adds value. Markets are auctions and auctions run best when there are active bidders.

dchichkov 14y ago
I doubt that HFT traders really engage into frontrunning or market manipulation. It is illegal. Supporting HFT infrastructure R&D is expensive. And takes nontrivial effort. It is simply too risky to engage in illegal activities. Edit: no point -> too risky
- niggler 14y ago
  "There is simply no point engaging into illegal activities." There are many major firms such as SAC capital that built a business around insider trading (which is also illegal). Just yesterday: http://www.businessweek.com/news/2012-10-02/ex-sac-capital-manager-tells-fbi-fund-used-insider-data http://www.businessweek.com/news/2012-10-02/ex-sac-capital-m...
  - dchichkov 14y ago
    Unlike HFT, insider trading doesn't require investment into infrastructure and R&D.
    - s_baby 14y ago
      Investment of someone elses money. To someone out there this is a rational risk to take.
    - tsotha 14y ago
      And if you do it right it doesn't leave a paper trail. I've always suspected insider trading is the norm, and the careless people get caught.
  - deleted 14y ago
    [deleted]
skybrian 14y ago
I thought all these computer trading algorithms had failsafes so they abandon the market when something goes wrong? Liquidity that disappears like that doesn't seem so useful.
- bd_at_rivenhill 14y ago
  Failsafes are triggered irregularly and are thus prone to bugs. It is also very rare to go back and review data with a separate implementation of the failsafe to see if the normal implementation is functioning incorrectly in certain circumstances, so errors in the failsafe algorithm can be difficult to detect until a major problem occurs.
- andylei 14y ago
  There's nothing preventing humans from abandoning the markets as well. This isn't unique to HFT. Human market makers can also withdraw their liquidity when things don't look good.
damoncali 14y ago
When one market participant breaks the market with his crappy program, that's a huge problem for the companies that use the public markets to raise money - the entire reason the markets exist. There was plenty of liquidity in the 90's and before to fulfill that function, even with the huge spreads back then. You are missing the forest for the trees.
- flyinglizard 14y ago
  Breaking the market with a crappy program costs the responsible firm tons of money, up to a complete insolvency. This system is mostly self-balancing.
  - damoncali 14y ago
    Mostly. Until it isn't. It only takes one really bad screw up to cause a boatload of damage.
    - icelancer 14y ago
      To the firm who is responsible. If they are buying up securities at well below-market rates, the problem solves itself.
      - damoncali 14y ago
        And anyone relying on that firm. What happens if a major bank pulls a Knight and blinks out of existence? Can this happen? I don't know. The answer to that question should be an emphatic "no."
- nickpinkston 14y ago
  There are already triggers in place now to stop trading when it gets out of reasonable bounds not right? Say like a x% shift throws an alarm that halts orders until a human looks at the situation, etc. I like the ticking exchanges (like the FTSE does not right?) where it "ticks" on the microsecond or some such so some of the clever hacks (locating near the datacenter) are eliminated. The real question at stake here is do we want to hold back real algorithmic innovation that we actually want? Of course we need to have alarms to head-off flash crashes, but we want a lot of great people working on getting information into the market as fast as possible right? I mean the end goal as I see it is the replace of most traders to algorithms that bring prices closer to market with better/faster information.
krickle 14y ago
It's fake liquidity IMO, since HF traders are only willing to take a position inbetween someone selling at one price and someone buying a bit high. The trade was going to go through without them in the middle. They are just skimming some money from the buyer, who would otherwise have a lower price at the cost of delaying a trade for half a second.
- balbeit 14y ago
  Can you explain that situation? As I read it, it goes like this. Someone is willing to buy at $1.50, and someone is willing to sell at $1.60. If an investor comes along that wants to buy right now, he has to buy from the seller at $1.60. But say a HFT quickly throws out a sell order at $1.59, so the investor is now able to buy at $1.59 from the HFT. The investor saved $0.01, and the HFT made a trade he must have wanted. Where is the money being skimmed?
  - aleyan 14y ago
    Lets take your example and extended to two investors. One who wants to buy and one who wants to sell. If Bid is at $1.50 and Ask at $1.60 then in an efficient market you can expect the two investors to meet at the middle and make the trade at $1.55. That will not occur. Instead of trading with each other, both investors would trade with liquidity providers who will step in to buy from one investor at $1.51 and sell at $1.59. As a result the investors will get their orders filled at only $.01 better than the expected bid/ask and the HFT guy would make $.08 in pure profit. In reality this does not occur. What happens is that another HFT guy would step in to offer $.02 to each investor in price improvement and take $.06 in spreads. The next HFT guy tries to shave off a little bit more until the spread narrows to $.01. HFT guys then try to take little bits of that remaining spread with exotic order types, rapidly putting and taking off orders, and other tricks and squeezing more money out becomes increasingly difficult. Edit: To clarify as per dchichkov comment, because of the competition between HFTs guys, the investors would only see a spread of $.01 or $.02. Thus both would trade around somewhere around $1.55 though not necessarily with each other.
    - 14y ago
mistercow 14y ago
>However, the article ignores these real issues and suggests that liquidity itself is a bad thing (or something not worth having). The author does not suggest that. Rather, he says that beyond a certain point, liquidity stops having any practical value.
- raymondh 14y ago
  > beyond a certain point, liquidity > stops having any practical value. Hogwash. Price improvement is "practical value". If you're selling an asset, there always practical value to have an immediate buyer willing to pay you a better price than the next guy. That's why auctions go to the highest bidder rather than the second higher bidder.
  - deleted 14y ago
    [deleted]

dchichkov 14y ago

I doubt that HFT traders really engage into frontrunning or market manipulation. It is illegal. Supporting HFT infrastructure R&D is expensive. And takes nontrivial effort. It is simply too risky to engage in illegal activities. Edit: no point -> too risky

niggler 14y ago
"There is simply no point engaging into illegal activities." There are many major firms such as SAC capital that built a business around insider trading (which is also illegal). Just yesterday: http://www.businessweek.com/news/2012-10-02/ex-sac-capital-manager-tells-fbi-fund-used-insider-data http://www.businessweek.com/news/2012-10-02/ex-sac-capital-m...
- dchichkov 14y ago
  Unlike HFT, insider trading doesn't require investment into infrastructure and R&D.
  - s_baby 14y ago
    Investment of someone elses money. To someone out there this is a rational risk to take.
  - tsotha 14y ago
    And if you do it right it doesn't leave a paper trail. I've always suspected insider trading is the norm, and the careless people get caught.
- deleted 14y ago
  [deleted]

skybrian 14y ago

I thought all these computer trading algorithms had failsafes so they abandon the market when something goes wrong? Liquidity that disappears like that doesn't seem so useful.

bd_at_rivenhill 14y ago
Failsafes are triggered irregularly and are thus prone to bugs. It is also very rare to go back and review data with a separate implementation of the failsafe to see if the normal implementation is functioning incorrectly in certain circumstances, so errors in the failsafe algorithm can be difficult to detect until a major problem occurs.
andylei 14y ago
There's nothing preventing humans from abandoning the markets as well. This isn't unique to HFT. Human market makers can also withdraw their liquidity when things don't look good.

damoncali 14y ago

When one market participant breaks the market with his crappy program, that's a huge problem for the companies that use the public markets to raise money - the entire reason the markets exist. There was plenty of liquidity in the 90's and before to fulfill that function, even with the huge spreads back then. You are missing the forest for the trees.

flyinglizard 14y ago
Breaking the market with a crappy program costs the responsible firm tons of money, up to a complete insolvency. This system is mostly self-balancing.
- damoncali 14y ago
  Mostly. Until it isn't. It only takes one really bad screw up to cause a boatload of damage.
  - icelancer 14y ago
    To the firm who is responsible. If they are buying up securities at well below-market rates, the problem solves itself.
    - damoncali 14y ago
      And anyone relying on that firm. What happens if a major bank pulls a Knight and blinks out of existence? Can this happen? I don't know. The answer to that question should be an emphatic "no."
nickpinkston 14y ago
There are already triggers in place now to stop trading when it gets out of reasonable bounds not right? Say like a x% shift throws an alarm that halts orders until a human looks at the situation, etc. I like the ticking exchanges (like the FTSE does not right?) where it "ticks" on the microsecond or some such so some of the clever hacks (locating near the datacenter) are eliminated. The real question at stake here is do we want to hold back real algorithmic innovation that we actually want? Of course we need to have alarms to head-off flash crashes, but we want a lot of great people working on getting information into the market as fast as possible right? I mean the end goal as I see it is the replace of most traders to algorithms that bring prices closer to market with better/faster information.

krickle 14y ago

It's fake liquidity IMO, since HF traders are only willing to take a position inbetween someone selling at one price and someone buying a bit high. The trade was going to go through without them in the middle. They are just skimming some money from the buyer, who would otherwise have a lower price at the cost of delaying a trade for half a second.

balbeit 14y ago
Can you explain that situation? As I read it, it goes like this. Someone is willing to buy at $1.50, and someone is willing to sell at $1.60. If an investor comes along that wants to buy right now, he has to buy from the seller at $1.60. But say a HFT quickly throws out a sell order at $1.59, so the investor is now able to buy at $1.59 from the HFT. The investor saved $0.01, and the HFT made a trade he must have wanted. Where is the money being skimmed?
- aleyan 14y ago
  Lets take your example and extended to two investors. One who wants to buy and one who wants to sell. If Bid is at $1.50 and Ask at $1.60 then in an efficient market you can expect the two investors to meet at the middle and make the trade at $1.55. That will not occur. Instead of trading with each other, both investors would trade with liquidity providers who will step in to buy from one investor at $1.51 and sell at $1.59. As a result the investors will get their orders filled at only $.01 better than the expected bid/ask and the HFT guy would make $.08 in pure profit. In reality this does not occur. What happens is that another HFT guy would step in to offer $.02 to each investor in price improvement and take $.06 in spreads. The next HFT guy tries to shave off a little bit more until the spread narrows to $.01. HFT guys then try to take little bits of that remaining spread with exotic order types, rapidly putting and taking off orders, and other tricks and squeezing more money out becomes increasingly difficult. Edit: To clarify as per dchichkov comment, because of the competition between HFTs guys, the investors would only see a spread of $.01 or $.02. Thus both would trade around somewhere around $1.55 though not necessarily with each other.
  - 14y ago

mistercow 14y ago

>However, the article ignores these real issues and suggests that liquidity itself is a bad thing (or something not worth having). The author does not suggest that. Rather, he says that beyond a certain point, liquidity stops having any practical value.

raymondh 14y ago
> beyond a certain point, liquidity > stops having any practical value. Hogwash. Price improvement is "practical value". If you're selling an asset, there always practical value to have an immediate buyer willing to pay you a better price than the next guy. That's why auctions go to the highest bidder rather than the second higher bidder.
- deleted 14y ago
  [deleted]