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What people don't seem to get about HFTs is that retail investors cannot and should not attempt to compete with them or trade actively at all - HFT or prop trad

What people don't seem to get about HFTs is that retail investors cannot and should not attempt to compete with them or trade actively at all - HFT or prop trading is a big no-no for the unsophisticated. Historically buying into an index fund during a crisis is a perfectly reasonable way to achieve relatively easy alpha above the mutual fund/bond rates (~12% per year). This type of investing (aka diversified value) is completely separate from HFT. As far as many retail investors should be concerned HFTs can duke it all out between themselves as much as they want - it really doesn't matter and is irrelevant to your long term investment decision. Indeed HFTs provide the benefit that during times of crisis they provide plenty of buy side liquidity for you to get in at a lower spread and a lower spot price relatively easily.

smoyer 14y ago
I agree completely ... let the HFTs eek out a few pennies per trade (or even fractions of cents). But I also wanted to see how much bandwidth my 4G phone could really use. Sorry for the perturbations I might have caused and I promise I'm only doing what's good for man-kind. Now if I could just get my phone to make a decent call!
- confluence 14y ago
  I don't know what you mean. HFTs don't do what's good for mankind - they do what's good for themselves. Just like everyone else. No one does what's good for mankind - they do what's best for themselves. We allow those who don't harm others to continue doing what benefits them - until such a time as it is shown to be harmful - then we stop it. HFTs have not been shown to be harmful.
  - marshallp 14y ago
    It's more nuanced than that. There are things like patents and copyrights. When it suits them, big C capitalists demand longer trading terms, then turn around and say the opposite when it comes to HFT (shorter trading terms). (They also do this with their accredited investor requirements). HFT harms society because it cuts off the number of investors that can do active trading. It's net effect is the same as regulations the keep out entrepreneurs from innovating in things like health care and drones and car manufacturing.
    - AJ007 14y ago
      How does having a greater number of investors doing "active trading" (which I assume means day trading) make society better off than having fewer? By this same logic society was better off having more people employed over turning dirt by hand in fields..
      - marshallp 14y ago
        (I mean trading in daily/weekly - not intra-day) Concentrating trading in a few hands is the problem we had - too big to fail. HFT will lead to barriers to new entrants (because of increasing startup costs).
        Permit 14y ago
        >Concentrating trading in a few hands is the problem we had - too big to fail No. You're confusing things. High frequency trading had nothing to do with financial bailouts. To my knowledge, no high frequency trading shop has ever been bailed out or deemed too big to fail. >HFT will lead to barriers to new entrants (because of increasing startup costs). Please explain this, how does HFT increase startup costs? I'm not sure who you think benefits the most out of high frequency trading, but it's not huge banks like Goldman Sachs. My understanding is that the best high frequency shops are relatively small. They're made up of a mix of programmer and quants, not traditional investment bankers.
        marshallp 14y ago
        I'm not confusing anything. Yes the previous crash wasn't HFT but current trends will lead to the already rich (the banks) being the HFT's because the land surrounding the exchange is limited and costs will increase (HFT is about land and computer resources, and high speed networks - new models don't factor in as much). It won't be programmers calling the shots, they'll be employed by the banks. Already, the average geek is outgunned (overall competitiveness has decreased).
        14y ago
  - erikpukinskis 14y ago
    No one does what's good for mankind - they do what's best for themselves. Just add a "in financial markets" after "No one" and you get my stamp of approval.
dfc 14y ago
Are you saying that HFTs have no impact on Alice and Bob regardless of how prudent they are about investing? In addition to ETFs Alice and Bob also have market exposure through a company 401k. Are the 401k managers and ETF managers immune to the effects of the HFTs? On the page[1] first documenting this algo NANEX says the following: "We believe that this algo will continue to grow and if left unchecked, could very well contribute to the next flash crash because it removes precious network capacity and provides zero economic value such as price discovery." Do you disagree? [1] http://www.nanex.net/aqck2/3610.html http://www.nanex.net/aqck2/3610.html
- confluence 14y ago
  It has no effect on Alice and Bob if they don't sell. It is favourable to them if they buy. The stock price is just the opinion of 0.2% of people at any one time - and hence means essentially nothing to an investor. Does the spot price opinion/first impression of a person matter - or does the long term attributes of their character matter? Just because there are more opinions - being given at a faster rate - doesn't mean that a) they're right or b) they should be acted upon as fact and c) that they shouldn't be exploited for those of a more stable nature. For example: I bought a huge amount of TSLA stock when it fell 12% in one day a week or so ago for no particular reason. I subsequently realised a 6% gain. I'm happy - thank you HFTs and short term traders - your vol makes my alpha.
  - knieveltech 14y ago
    What you are describing is a method of turning a profit on automated wealth destruction, or am I misunderstanding something?
    - Variance 14y ago
      There's as much wealth created when the price rises again as there is destroyed when the price first erroneously falls, all other things equal. What's really being described is turning a profit on prices that are, for whatever reason, set too low and return to previous levels soon after.
mcphilip 14y ago
>Indeed HFTs provide the benefit that during times of crisis they provide plenty of sell side liquidity... Any proof to that claim? Liquidity evaporated during the flash crash. The SLPs have no obligation to provide liquidity and can simply pull the plug when the market is in crisis. [1][2] [1]http://finance.yahoo.com/mbview/threadview/?m=tm&bn=228&tid=56325&mid=56325&tof=5&rt=2&frt=2&off=1 http://finance.yahoo.com/mbview/threadview/?m=tm&bn=228&... [2]http://compoundingmyinterests.com/compounding-the-blog/2012/2/23/on-hft-liquidity-and-the-flash-crash.html http://compoundingmyinterests.com/compounding-the-blog/2012/...
- confluence 14y ago
  Buy side liquidity means quick access to sellers at little cost and on favourable terms to you. This was always the case - HFTs just make it faster and easier. So if you are a buyer in a crisis - you get a better deal with HFTs quickly matching supply/demand of large stock orders. If you are a seller - you're screwed either way - HFT or not (see history).
  - 001sky 14y ago
    and on favourable terms to you Not so much when they front-run you...LOL
    - confluence 14y ago
      During a liquidity crisis - aka any crisis - buyers don't get front run - sellers do. There is a reason for this - front running only occurs when you want something (liquidity) without having to pay for it first. For example: You want to off load a metric ton of stock in a company - you tell your broker - he puts out a VWAP sell call to an algorithm - HFTs realise - they short sell to anticipate your liquidity premium (aka you want to sell NOW and you are willing to pay for it). If you didn't want to get out so bad - you cannot be front run - because you wouldn't demand a liquidity premium.
      - 001sky 14y ago
trotsky 14y ago
Prop trading (proprietary trading) just means a firm is using their own money as opposed to trading on a customer's behalf. So the retail investor is by definition almost always engaging in the practice.

smoyer 14y ago

I agree completely ... let the HFTs eek out a few pennies per trade (or even fractions of cents). But I also wanted to see how much bandwidth my 4G phone could really use. Sorry for the perturbations I might have caused and I promise I'm only doing what's good for man-kind. Now if I could just get my phone to make a decent call!

confluence 14y ago
I don't know what you mean. HFTs don't do what's good for mankind - they do what's good for themselves. Just like everyone else. No one does what's good for mankind - they do what's best for themselves. We allow those who don't harm others to continue doing what benefits them - until such a time as it is shown to be harmful - then we stop it. HFTs have not been shown to be harmful.
- marshallp 14y ago
  It's more nuanced than that. There are things like patents and copyrights. When it suits them, big C capitalists demand longer trading terms, then turn around and say the opposite when it comes to HFT (shorter trading terms). (They also do this with their accredited investor requirements). HFT harms society because it cuts off the number of investors that can do active trading. It's net effect is the same as regulations the keep out entrepreneurs from innovating in things like health care and drones and car manufacturing.
  - AJ007 14y ago
    How does having a greater number of investors doing "active trading" (which I assume means day trading) make society better off than having fewer? By this same logic society was better off having more people employed over turning dirt by hand in fields..
    - marshallp 14y ago
      (I mean trading in daily/weekly - not intra-day) Concentrating trading in a few hands is the problem we had - too big to fail. HFT will lead to barriers to new entrants (because of increasing startup costs).
      - Permit 14y ago
        >Concentrating trading in a few hands is the problem we had - too big to fail No. You're confusing things. High frequency trading had nothing to do with financial bailouts. To my knowledge, no high frequency trading shop has ever been bailed out or deemed too big to fail. >HFT will lead to barriers to new entrants (because of increasing startup costs). Please explain this, how does HFT increase startup costs? I'm not sure who you think benefits the most out of high frequency trading, but it's not huge banks like Goldman Sachs. My understanding is that the best high frequency shops are relatively small. They're made up of a mix of programmer and quants, not traditional investment bankers.
        marshallp 14y ago
        I'm not confusing anything. Yes the previous crash wasn't HFT but current trends will lead to the already rich (the banks) being the HFT's because the land surrounding the exchange is limited and costs will increase (HFT is about land and computer resources, and high speed networks - new models don't factor in as much). It won't be programmers calling the shots, they'll be employed by the banks. Already, the average geek is outgunned (overall competitiveness has decreased).
        14y ago
- erikpukinskis 14y ago
  No one does what's good for mankind - they do what's best for themselves. Just add a "in financial markets" after "No one" and you get my stamp of approval.

dfc 14y ago

Are you saying that HFTs have no impact on Alice and Bob regardless of how prudent they are about investing? In addition to ETFs Alice and Bob also have market exposure through a company 401k. Are the 401k managers and ETF managers immune to the effects of the HFTs? On the page[1] first documenting this algo NANEX says the following: "We believe that this algo will continue to grow and if left unchecked, could very well contribute to the next flash crash because it removes precious network capacity and provides zero economic value such as price discovery." Do you disagree? [1] http://www.nanex.net/aqck2/3610.html http://www.nanex.net/aqck2/3610.html

confluence 14y ago
It has no effect on Alice and Bob if they don't sell. It is favourable to them if they buy. The stock price is just the opinion of 0.2% of people at any one time - and hence means essentially nothing to an investor. Does the spot price opinion/first impression of a person matter - or does the long term attributes of their character matter? Just because there are more opinions - being given at a faster rate - doesn't mean that a) they're right or b) they should be acted upon as fact and c) that they shouldn't be exploited for those of a more stable nature. For example: I bought a huge amount of TSLA stock when it fell 12% in one day a week or so ago for no particular reason. I subsequently realised a 6% gain. I'm happy - thank you HFTs and short term traders - your vol makes my alpha.
- knieveltech 14y ago
  What you are describing is a method of turning a profit on automated wealth destruction, or am I misunderstanding something?
  - Variance 14y ago
    There's as much wealth created when the price rises again as there is destroyed when the price first erroneously falls, all other things equal. What's really being described is turning a profit on prices that are, for whatever reason, set too low and return to previous levels soon after.

mcphilip 14y ago

>Indeed HFTs provide the benefit that during times of crisis they provide plenty of sell side liquidity... Any proof to that claim? Liquidity evaporated during the flash crash. The SLPs have no obligation to provide liquidity and can simply pull the plug when the market is in crisis. [1][2] [1]http://finance.yahoo.com/mbview/threadview/?m=tm&bn=228&tid=56325&mid=56325&tof=5&rt=2&frt=2&off=1 http://finance.yahoo.com/mbview/threadview/?m=tm&bn=228&... [2]http://compoundingmyinterests.com/compounding-the-blog/2012/2/23/on-hft-liquidity-and-the-flash-crash.html http://compoundingmyinterests.com/compounding-the-blog/2012/...

confluence 14y ago
Buy side liquidity means quick access to sellers at little cost and on favourable terms to you. This was always the case - HFTs just make it faster and easier. So if you are a buyer in a crisis - you get a better deal with HFTs quickly matching supply/demand of large stock orders. If you are a seller - you're screwed either way - HFT or not (see history).
- 001sky 14y ago
  and on favourable terms to you Not so much when they front-run you...LOL
  - confluence 14y ago
    During a liquidity crisis - aka any crisis - buyers don't get front run - sellers do. There is a reason for this - front running only occurs when you want something (liquidity) without having to pay for it first. For example: You want to off load a metric ton of stock in a company - you tell your broker - he puts out a VWAP sell call to an algorithm - HFTs realise - they short sell to anticipate your liquidity premium (aka you want to sell NOW and you are willing to pay for it). If you didn't want to get out so bad - you cannot be front run - because you wouldn't demand a liquidity premium.
    - 001sky 14y ago

trotsky 14y ago

Prop trading (proprietary trading) just means a firm is using their own money as opposed to trading on a customer's behalf. So the retail investor is by definition almost always engaging in the practice.