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The conclusion wasn't that this was caused by HFT but because NASDAQ and the NYSE only showed trades that had a size of 100 or greater in their public feeds. Si

by elemeno 13y ago

The conclusion wasn't that this was caused by HFT but because NASDAQ and the NYSE only showed trades that had a size of 100 or greater in their public feeds. Since a 100 shares of APPL is worth $50,000+, there's a lot of trades being made for less than 100 shares and, until the reporting changes made a few weeks ago, they didn't show up on the public feed. This means that trade volume wasn't being reported accurately, and that the public feed wasn't representative of the active price of a stock like APPL - which is a fairly big deal when, according to the article, 45% of APPL trades are in lot sizes of under 100 shares. For professional traders (and here's the only place where HFT is relevant) it's not a big deal since they don't use the public feeds but instead pay for feeds from the exchanges which include all trades.

crag 13y ago
It's a big deal to everyone who is not a "professional" trader. Oh and by the way, HFT mostly trade low volume at high speed. In other words, trading 5 shares of Apple 5 million times an hour. That makes money. It's not about the big pay-off. It's about the pennies all adding up. And also explain why the stock was wildly moving all over the place. Personally I think this type of trading should be illegal. Right now, unless you have a data center right next to the exchange you are trading at a disadvantage. And it just adds to the many reason why I think the game is rigged. To favor the big houses. You're almost better off at Vegas.
- cmdkeen 13y ago
  If you're investing over anything approaching the short term then it is exactly like playing at Vegas, except the card counters aren't banned. If you invest, i.e. over 10+ years then HFT doesn't matter other than giving you better liquidity and lower spreads. There is much, much less competition in that space, no computer trading and you are capable of actually doing research. Investing and watching daily stock moves is a sure fire way of losing your hair and becoming miserable.
  - crag 13y ago
    "Investing and watching daily stock moves is a sure fire way of losing your hair and becoming miserable." Agreed.
  - pbhjpbhj 13y ago
    >If you invest, i.e. over 10+ years then HFT doesn't matter // Is there any proof of this. How long have we had this sort of HFT? Strikes me that HFT is extracting value from the market. The prices are usually relatively stable they're increasing the draw of money away from smaller traders but also removing value overall (in the form of money) from the system and not adding much value. Yes, liquidity, yadda-yadda but surely market liquidity is no greater now but HFT is far more effectively removing money (a proxy for the value extracted). In other words other people are creating value and HFT is a sink for it. The bar to entry to the HFT camp means there should be an overall movement of capital towards the most wealthy in this sort of system.
    - IanDrake 13y ago
      >Strikes me that HFT is extracting value from the market. The prices are usually relatively stable they're increasing the draw of money away from smaller traders but also removing value overall (in the form of money) from the system and not adding much value. Can you explain how that works?
    - hfttrader 13y ago
      Why are the other people creating value, while HFT traders do not? Both types of players extract value from the market, while improving market efficiency. HFT definitely has high entry costs (10's of millions of dollars), and firms that aren't serious about HFT can't participate. Note that HFT only makes 2 billion a year, so they aren't actually missing out on that much. HFT just isn't a very big space, compared to long term investing, and doesn't represent very much movement of capital. (The wealthy don't really invest in HFT, since HFT firms generally don't accept outside capital, or need any substantial amount of capital to operate)
    - cmdkeen 13y ago
      HFT extracts the value from transactions. It won't extract the value from a company becoming twice as valuable. Invest because you think the company is going to be successful and thus more valuable. The actual amount of stock that is HFT traded is tiny relative for each company, long term price is driven by what institutional investors are willing to pay for actual percentages of a company.
- hfttrader 13y ago
  Generally, HFT firms end up decreasing volatility. They price stock more accurately, which makes them money and decreases volatility. If they were increasing volatility, they would make infinite money, since the source of their profit is the volatility. The main scenario where HFT firms increase volatility is when their algorithms break (either due to a programming error, or because they cease to accurately model the market due to a change in market conditions). In that case, the misfiring algorithm will increase the market volatility, and lose the HFT firm money. You absolutely right that firms without co-located data centers are at a disadvantage. Thankfully, this only really matters if you are trying to compete with HFT firms. So it's not a big issue for people who trade on a longer time scales. The HFT firms do make some money off of these long term investors, and in exchange provide increased liquidity, decreased spreads, and decreased volatility. (if the HFT firms weren't offering the best prices for the stocks, then the long term investors wouldn't be buying from them)
  - yummyfajitas 13y ago
    And, as I often point out to critics, you don't have to buy liquidity if you don't want to. Use ALO orders or just don't cross the spread. http://usequities.nyx.com/markets/nyse-arca-equities/order-types http://usequities.nyx.com/markets/nyse-arca-equities/order-t...
    - gergles 13y ago
      Great, could you explain to me as a retail investor without direct access to the exchanges how to place an ALO order and to buy or sell without enriching HFT shops? (Hint: you can't.)
      - yummyfajitas 13y ago
        With a retail broker it's moot - they charge you a flat $8/trade regardless of whether you add or remove liquidity. You never collect rebates or pay to take liquidity. You can still choose not to cross the spread with a retail broker. Just place limit orders on the right side of the spread.
- elemeno 13y ago
  In my experience HFT is a boogeyman. It's not well understood, and it's easy to blame for ills real and imagined - in part because you only tend to hear about it when something goes wrong and a Knight Capital type event happens, although that can apply to any firm that does any form of automated trading such as Market Makers and Algo traders and is definitely not the sole preserve of HFT shops. Based on what I know and see, I believe that the existence of HFT is generally an aid to price discovery (due to the narrower spreads), and liquidity (more actors means a better chance that someone will take the other side of a trade). In that respect, they're not too dissimilar to Market Makers, although a true market maker has additional responsibilities in terms of being willing to trade in illiquid products. If you're not a professional trader then the topic of the article really isn't a big deal. If your trading style is such that it's significantly material whether you trade at 510 or 511, or whether your trade executes in the next minute or the next thirty minutes, then you're always going to be at a huge disadvantage compared to people who can get the best price and most immediate execution. A trading firm who are willing to pay to connect directly to an exchange will always get a better price than you can. It's not horribly different to why the restaurant down the block from you gets better prices for produce than you do - their business affords them better access to the produce market. Edit - For what it's worth, the bulk of my career has been in finance, mostly as a Quant-Developer at a mix of buy-side and sell-side firms and more recently as technology consultant who specializes in Capital Markets.
  - IanDrake 13y ago
    Yes, the never ending and hard to pin down boogeyman. Today it's HFT, tomorrow it's day traders, the next private equity. All these thing are so evil, so easy to do, and the people who do them are making so much money, which should be our money really because they're robbing our 401Ks blind. Of course, I'm being sarcastic, but this is what media is selling and most people are buying it without any pause for reflection.
  - nimble 13y ago
    There is an obvious problem with HFT: it gives an advantage to lower latency analysis and communication, leading to huge amounts of wasted effort getting faster pipes and software, co-locating automated trading, etc. None of this is delivering real value to the economy, as far as I can see. If you have an argument for why trades that happen at millisecond time scales help liquidity and price discovery over what you'd get with a system that handled trades on the scale of minutes, I'd like to hear it. I have a hard time imagining that the benefits (to society at large) could outweigh the costs of the waste when I see what's being done. That said, I agree that the high frequency of trades themselves are probably not the problem. The problem is rewarding a latency/processing advantage.
- ahfttrader 13y ago
  Hft market makers, the ones that thrive on collecting fees for for trading, are required to send orders in even lots. They can only send odd lots to hedge, and even that is a recent development.
TheAnimus 13y ago
Indeed, this is a bit of a non-story. Lower volume customers have lower fixed costs, they generally get much worse quotes (higher spreads) too. The fact is whilst $56k might sound like a lot to some person day trader, it is nothing compared to the actual market cap of the stock. It also has absolutely nothing to do with the use of HFT. HFT only competes against other HFT. There is nothing here to suggest it has been effecting the price for the small customers (normally this is what HFT is credited at doing well, providing liquidity and removing pricing inefficencies) People hate HFT because it can go 'screwy'.
- crag 13y ago
  Actually HFT does manipulate the overall price of the share. In the public markets. And that's the problem.
  - yummyfajitas 13y ago
    How? Can you explain the specific mechanism (i.e., what orders are placed by which party and when) and the role that "high frequency" plays in the mechanism?
    - mschuster91 13y ago
      Just remember that Knight Capital episode. Algorithm ran amok, they lost a decent chunk of money (460M US$!) and were bought out a couple of weeks later (http://en.wikipedia.org/wiki/Knight_Capital_Group#2012_stock_trading_disruption http://en.wikipedia.org/wiki/Knight_Capital_Group#2012_stock...).
      - hfttrader 13y ago
        That isn't really an example of market manipulation. Market manipulation is an intentional manipulation of the market. (http://en.wikipedia.org/wiki/Market_manipulation http://en.wikipedia.org/wiki/Market_manipulation) The Knight Capital incident was an example of a firm performing bad trades due to an error in their systems. Their behavior certainly wasn't intentional or profitable. HFT isn't based on market manipulation. Some HFT firms perform market manipulation, as do some non HFT firms, but this practice is illegal. (For example, newedge was recently fined for market manipulation)

by elemeno 13y ago

crag 13y ago

It's a big deal to everyone who is not a "professional" trader. Oh and by the way, HFT mostly trade low volume at high speed. In other words, trading 5 shares of Apple 5 million times an hour. That makes money. It's not about the big pay-off. It's about the pennies all adding up. And also explain why the stock was wildly moving all over the place. Personally I think this type of trading should be illegal. Right now, unless you have a data center right next to the exchange you are trading at a disadvantage. And it just adds to the many reason why I think the game is rigged. To favor the big houses. You're almost better off at Vegas.

cmdkeen 13y ago
If you're investing over anything approaching the short term then it is exactly like playing at Vegas, except the card counters aren't banned. If you invest, i.e. over 10+ years then HFT doesn't matter other than giving you better liquidity and lower spreads. There is much, much less competition in that space, no computer trading and you are capable of actually doing research. Investing and watching daily stock moves is a sure fire way of losing your hair and becoming miserable.
- crag 13y ago
  "Investing and watching daily stock moves is a sure fire way of losing your hair and becoming miserable." Agreed.
- pbhjpbhj 13y ago
  >If you invest, i.e. over 10+ years then HFT doesn't matter // Is there any proof of this. How long have we had this sort of HFT? Strikes me that HFT is extracting value from the market. The prices are usually relatively stable they're increasing the draw of money away from smaller traders but also removing value overall (in the form of money) from the system and not adding much value. Yes, liquidity, yadda-yadda but surely market liquidity is no greater now but HFT is far more effectively removing money (a proxy for the value extracted). In other words other people are creating value and HFT is a sink for it. The bar to entry to the HFT camp means there should be an overall movement of capital towards the most wealthy in this sort of system.
  - IanDrake 13y ago
    >Strikes me that HFT is extracting value from the market. The prices are usually relatively stable they're increasing the draw of money away from smaller traders but also removing value overall (in the form of money) from the system and not adding much value. Can you explain how that works?
  - hfttrader 13y ago
    Why are the other people creating value, while HFT traders do not? Both types of players extract value from the market, while improving market efficiency. HFT definitely has high entry costs (10's of millions of dollars), and firms that aren't serious about HFT can't participate. Note that HFT only makes 2 billion a year, so they aren't actually missing out on that much. HFT just isn't a very big space, compared to long term investing, and doesn't represent very much movement of capital. (The wealthy don't really invest in HFT, since HFT firms generally don't accept outside capital, or need any substantial amount of capital to operate)
  - cmdkeen 13y ago
    HFT extracts the value from transactions. It won't extract the value from a company becoming twice as valuable. Invest because you think the company is going to be successful and thus more valuable. The actual amount of stock that is HFT traded is tiny relative for each company, long term price is driven by what institutional investors are willing to pay for actual percentages of a company.
hfttrader 13y ago
Generally, HFT firms end up decreasing volatility. They price stock more accurately, which makes them money and decreases volatility. If they were increasing volatility, they would make infinite money, since the source of their profit is the volatility. The main scenario where HFT firms increase volatility is when their algorithms break (either due to a programming error, or because they cease to accurately model the market due to a change in market conditions). In that case, the misfiring algorithm will increase the market volatility, and lose the HFT firm money. You absolutely right that firms without co-located data centers are at a disadvantage. Thankfully, this only really matters if you are trying to compete with HFT firms. So it's not a big issue for people who trade on a longer time scales. The HFT firms do make some money off of these long term investors, and in exchange provide increased liquidity, decreased spreads, and decreased volatility. (if the HFT firms weren't offering the best prices for the stocks, then the long term investors wouldn't be buying from them)
- yummyfajitas 13y ago
  And, as I often point out to critics, you don't have to buy liquidity if you don't want to. Use ALO orders or just don't cross the spread. http://usequities.nyx.com/markets/nyse-arca-equities/order-types http://usequities.nyx.com/markets/nyse-arca-equities/order-t...
  - gergles 13y ago
    Great, could you explain to me as a retail investor without direct access to the exchanges how to place an ALO order and to buy or sell without enriching HFT shops? (Hint: you can't.)
    - yummyfajitas 13y ago
      With a retail broker it's moot - they charge you a flat $8/trade regardless of whether you add or remove liquidity. You never collect rebates or pay to take liquidity. You can still choose not to cross the spread with a retail broker. Just place limit orders on the right side of the spread.
elemeno 13y ago
In my experience HFT is a boogeyman. It's not well understood, and it's easy to blame for ills real and imagined - in part because you only tend to hear about it when something goes wrong and a Knight Capital type event happens, although that can apply to any firm that does any form of automated trading such as Market Makers and Algo traders and is definitely not the sole preserve of HFT shops. Based on what I know and see, I believe that the existence of HFT is generally an aid to price discovery (due to the narrower spreads), and liquidity (more actors means a better chance that someone will take the other side of a trade). In that respect, they're not too dissimilar to Market Makers, although a true market maker has additional responsibilities in terms of being willing to trade in illiquid products. If you're not a professional trader then the topic of the article really isn't a big deal. If your trading style is such that it's significantly material whether you trade at 510 or 511, or whether your trade executes in the next minute or the next thirty minutes, then you're always going to be at a huge disadvantage compared to people who can get the best price and most immediate execution. A trading firm who are willing to pay to connect directly to an exchange will always get a better price than you can. It's not horribly different to why the restaurant down the block from you gets better prices for produce than you do - their business affords them better access to the produce market. Edit - For what it's worth, the bulk of my career has been in finance, mostly as a Quant-Developer at a mix of buy-side and sell-side firms and more recently as technology consultant who specializes in Capital Markets.
- IanDrake 13y ago
  Yes, the never ending and hard to pin down boogeyman. Today it's HFT, tomorrow it's day traders, the next private equity. All these thing are so evil, so easy to do, and the people who do them are making so much money, which should be our money really because they're robbing our 401Ks blind. Of course, I'm being sarcastic, but this is what media is selling and most people are buying it without any pause for reflection.
- nimble 13y ago
  There is an obvious problem with HFT: it gives an advantage to lower latency analysis and communication, leading to huge amounts of wasted effort getting faster pipes and software, co-locating automated trading, etc. None of this is delivering real value to the economy, as far as I can see. If you have an argument for why trades that happen at millisecond time scales help liquidity and price discovery over what you'd get with a system that handled trades on the scale of minutes, I'd like to hear it. I have a hard time imagining that the benefits (to society at large) could outweigh the costs of the waste when I see what's being done. That said, I agree that the high frequency of trades themselves are probably not the problem. The problem is rewarding a latency/processing advantage.
ahfttrader 13y ago
Hft market makers, the ones that thrive on collecting fees for for trading, are required to send orders in even lots. They can only send odd lots to hedge, and even that is a recent development.

TheAnimus 13y ago

Indeed, this is a bit of a non-story. Lower volume customers have lower fixed costs, they generally get much worse quotes (higher spreads) too. The fact is whilst $56k might sound like a lot to some person day trader, it is nothing compared to the actual market cap of the stock. It also has absolutely nothing to do with the use of HFT. HFT only competes against other HFT. There is nothing here to suggest it has been effecting the price for the small customers (normally this is what HFT is credited at doing well, providing liquidity and removing pricing inefficencies) People hate HFT because it can go 'screwy'.

crag 13y ago
Actually HFT does manipulate the overall price of the share. In the public markets. And that's the problem.
- yummyfajitas 13y ago
  How? Can you explain the specific mechanism (i.e., what orders are placed by which party and when) and the role that "high frequency" plays in the mechanism?
  - mschuster91 13y ago
    Just remember that Knight Capital episode. Algorithm ran amok, they lost a decent chunk of money (460M US$!) and were bought out a couple of weeks later (http://en.wikipedia.org/wiki/Knight_Capital_Group#2012_stock_trading_disruption http://en.wikipedia.org/wiki/Knight_Capital_Group#2012_stock...).
    - hfttrader 13y ago
      That isn't really an example of market manipulation. Market manipulation is an intentional manipulation of the market. (http://en.wikipedia.org/wiki/Market_manipulation http://en.wikipedia.org/wiki/Market_manipulation) The Knight Capital incident was an example of a firm performing bad trades due to an error in their systems. Their behavior certainly wasn't intentional or profitable. HFT isn't based on market manipulation. Some HFT firms perform market manipulation, as do some non HFT firms, but this practice is illegal. (For example, newedge was recently fined for market manipulation)