3 ms·

Are they "trading" or "high-frequency-ripping-off-retail-investors"? It's easy to make paper billions with synthetic shares and infinite deadline extensions fo

by bflesch 1mo ago

Are they "trading" or "high-frequency-ripping-off-retail-investors"? It's easy to make paper billions with synthetic shares and infinite deadline extensions for settlement. I'm old and still remember when Ken Griffin was lauded a clever person before he got caught with his hands in the GME mayo jar..

loeg 1mo ago
> Are they "trading" or "high-frequency-ripping-off-retail-investors"? HFT doesn't cost retail investors anything.
- SanDiegoSun 1mo ago
  HFT raises pricing for retail traders by allowing front running of trades and makes the market less competitive overall for those without the infrastructure to do so. This isn’t even in question.
  - phil21 1mo ago
    It's very much in question. As much as I hate to admit that since I do not like the concept of HFT existing as it's not providing very much value to society (imo) compared to the money made. The intellectual power behind this stuff would be much better put to use for something productive. It likely lowers the transaction costs due to adding liquidity and narrowing bid/ask spreads for small retail orders. But indirectly it likely raises costs for institutional investors like pension funds and large ETF managers making giant block trades on behalf their beneficiaries. So tldr; Probably fractionally better pricing for your $5k GOOG trade, fractionally worse for your VOO holdings over the long term.
    - lokar 1mo ago
      Does it really hurt institutional traders? How? Is it based on the idea that they can’t get the retail spreads? Because there is no world where they would have ever gotten them. A market maker would loose money doing that.
      - phil21 1mo ago
        I'm certainly no expert whatsoever. This is just my understanding from talking with a few folks I consider quite smart who work in the space. Some working for HFT firms, some elsewhere. Also reading on the topic over the years. There does seem to at least be some evidence that HFT firms decrease retail spreads overall. Either way, my main point being made is that negative impact to retail traders is very much in question. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2183806 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2183806
        lokar 1mo ago
        That seems to be about a fee change that increased costs for market makers, widening spreads.
  - loeg 1mo ago
    No, it doesn't. HFT lowers spreads for retail at the cost of slower market makers -- hedge funds. HFT isn't front-running (which is illegal).
    - apimade 1mo ago
      [dead]
- Retric 1mo ago
  Market makers are simply an artifact due to how shares are traded based on limitations that existed before computers. The aren’t some inherent aspect of having a stock market. The money isn’t coming from thin air. If N people trade a a finite set of shares back and forth every day the only way to extract money from that set of people is for them to lose money.
  - ralph84 1mo ago
    Yeah, the stock market may be positive sum over the long-term, but it's certainly zero sum over the millisecond-term. Whether it's "retail" or "institutional" that is paying for HFT profits, it's all retail in the end.
    - Anon1096 1mo ago
      The millisecond-term zero sum game is part of what allows for a positive sum long term. For example, zero fee trading was pioneered by Robinhood and only possible because of payment for order flow, and as a result it's virtually unheard of now for retail to be paying per transaction. Now more retail investors can participate and everyone benefits. You can also point to lower spreads and faster execution as direct benefits.
      - ralph84 1mo ago
        Or you could just hold auctions a few times per day and eliminate the billions of dollars spent trying to win a pointless race.
        loeg 1mo ago
        No one wants four-trades-a-day settlement to save 0.00001% or whatever in trading fees.
        amenhotep 1mo ago
        That's true, we don't want it to do that, we want it to kill these parasitic entities. Much like one doesn't swat a mosquito because one will truly miss the amount of blood she's taking.
- apimade 1mo ago
  Liquidity providers like Jane Street, Citadel, et al make money on the spread. They also buy order flows from integrators, and retail investor order flows are now a product. i.e. retail investor → brokerage platform → clearing/execution infrastructure → Jane Street → payment back toward the brokerage side of the chain. Who captures the economic value created by retail order flow? Jane Street. In an ideal market, this product line shouldn't exist. Institutional investors should not be making money on the activity of retail investors. What incentives determine where that flow is sent, and would investors receive better execution if their orders were exposed to genuinely competitive price formation rather than privately internalised by a concentrated group of wholesalers? The regulators should be squashing any HFT related or retail order flow, but it's so opaque _by design_ that getting policymakers, or the general public, to understand that retail investors are paying some portion of tax on their $20T USD annual trades to these companies. Granted, these order flows _sometimes_ work the other way -- and retail users get a better deal on a trade.. But would you really expect the market to be worth what it is, if that was the case less more often than not? There is a clear and obvious conflict: the broker is supposed to seek the best execution for the customer while potentially being paid by the firm receiving that customer’s order. How can that be, when the broker's in bed with the liquidity providers?
  - loeg 1mo ago
    PFOF and HFT are distinct concepts, but they are widely conflated in this thread. I don't agree that PFOF is inherently bad, but even if it were: it is not a valid criticism of HFT.
ianm218 1mo ago
Isn’t Ken Griffin still considered very clever? Citadel is one of the most successful hedge funds of the is era and has largely accelerated since 2020.
- Taikhoom10 1mo ago
  [flagged]
- bflesch 1mo ago
  There's this famous line item which is called something like "securities sold but not yet purchased", e.g. with their market maker privilege Citadel can create infinite synthetic shares out of thin air to facilitate that a trade happens, but they have abused this privilege on a very large scale which has created an idiosyncratic risk to all stock market investors. Due to regulatory capture of the SEC this risk has not materialized in an overall market crash, but they have done numerous accounting shenanigans and deadline extensions to give Citadel more room to breathe.

by bflesch 1mo ago

loeg 1mo ago

> Are they "trading" or "high-frequency-ripping-off-retail-investors"? HFT doesn't cost retail investors anything.

SanDiegoSun 1mo ago
HFT raises pricing for retail traders by allowing front running of trades and makes the market less competitive overall for those without the infrastructure to do so. This isn’t even in question.
- phil21 1mo ago
  It's very much in question. As much as I hate to admit that since I do not like the concept of HFT existing as it's not providing very much value to society (imo) compared to the money made. The intellectual power behind this stuff would be much better put to use for something productive. It likely lowers the transaction costs due to adding liquidity and narrowing bid/ask spreads for small retail orders. But indirectly it likely raises costs for institutional investors like pension funds and large ETF managers making giant block trades on behalf their beneficiaries. So tldr; Probably fractionally better pricing for your $5k GOOG trade, fractionally worse for your VOO holdings over the long term.
  - lokar 1mo ago
    Does it really hurt institutional traders? How? Is it based on the idea that they can’t get the retail spreads? Because there is no world where they would have ever gotten them. A market maker would loose money doing that.
    - phil21 1mo ago
      I'm certainly no expert whatsoever. This is just my understanding from talking with a few folks I consider quite smart who work in the space. Some working for HFT firms, some elsewhere. Also reading on the topic over the years. There does seem to at least be some evidence that HFT firms decrease retail spreads overall. Either way, my main point being made is that negative impact to retail traders is very much in question. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2183806 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2183806
      - lokar 1mo ago
        That seems to be about a fee change that increased costs for market makers, widening spreads.
- loeg 1mo ago
  No, it doesn't. HFT lowers spreads for retail at the cost of slower market makers -- hedge funds. HFT isn't front-running (which is illegal).
  - apimade 1mo ago
    [dead]
Retric 1mo ago
Market makers are simply an artifact due to how shares are traded based on limitations that existed before computers. The aren’t some inherent aspect of having a stock market. The money isn’t coming from thin air. If N people trade a a finite set of shares back and forth every day the only way to extract money from that set of people is for them to lose money.
- ralph84 1mo ago
  Yeah, the stock market may be positive sum over the long-term, but it's certainly zero sum over the millisecond-term. Whether it's "retail" or "institutional" that is paying for HFT profits, it's all retail in the end.
  - Anon1096 1mo ago
    The millisecond-term zero sum game is part of what allows for a positive sum long term. For example, zero fee trading was pioneered by Robinhood and only possible because of payment for order flow, and as a result it's virtually unheard of now for retail to be paying per transaction. Now more retail investors can participate and everyone benefits. You can also point to lower spreads and faster execution as direct benefits.
    - ralph84 1mo ago
      Or you could just hold auctions a few times per day and eliminate the billions of dollars spent trying to win a pointless race.
      - loeg 1mo ago
        No one wants four-trades-a-day settlement to save 0.00001% or whatever in trading fees.
        amenhotep 1mo ago
        That's true, we don't want it to do that, we want it to kill these parasitic entities. Much like one doesn't swat a mosquito because one will truly miss the amount of blood she's taking.
apimade 1mo ago
Liquidity providers like Jane Street, Citadel, et al make money on the spread. They also buy order flows from integrators, and retail investor order flows are now a product. i.e. retail investor → brokerage platform → clearing/execution infrastructure → Jane Street → payment back toward the brokerage side of the chain. Who captures the economic value created by retail order flow? Jane Street. In an ideal market, this product line shouldn't exist. Institutional investors should not be making money on the activity of retail investors. What incentives determine where that flow is sent, and would investors receive better execution if their orders were exposed to genuinely competitive price formation rather than privately internalised by a concentrated group of wholesalers? The regulators should be squashing any HFT related or retail order flow, but it's so opaque _by design_ that getting policymakers, or the general public, to understand that retail investors are paying some portion of tax on their $20T USD annual trades to these companies. Granted, these order flows _sometimes_ work the other way -- and retail users get a better deal on a trade.. But would you really expect the market to be worth what it is, if that was the case less more often than not? There is a clear and obvious conflict: the broker is supposed to seek the best execution for the customer while potentially being paid by the firm receiving that customer’s order. How can that be, when the broker's in bed with the liquidity providers?
- loeg 1mo ago
  PFOF and HFT are distinct concepts, but they are widely conflated in this thread. I don't agree that PFOF is inherently bad, but even if it were: it is not a valid criticism of HFT.

ianm218 1mo ago

Isn’t Ken Griffin still considered very clever? Citadel is one of the most successful hedge funds of the is era and has largely accelerated since 2020.

Taikhoom10 1mo ago
[flagged]
bflesch 1mo ago
There's this famous line item which is called something like "securities sold but not yet purchased", e.g. with their market maker privilege Citadel can create infinite synthetic shares out of thin air to facilitate that a trade happens, but they have abused this privilege on a very large scale which has created an idiosyncratic risk to all stock market investors. Due to regulatory capture of the SEC this risk has not materialized in an overall market crash, but they have done numerous accounting shenanigans and deadline extensions to give Citadel more room to breathe.