4 ms·
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 i
by 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 agoYes, 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 agoThere 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.
- snowwrestler 13y agoIf a HFT firm makes a profit then they are, by definition, adding value to the economy. All that technology investment is not a waste; it allows firms to condense money out of information asymmetries with ever greater efficiency. Edit to add: if you prefer industries that build "real things" then look at the revenue that HFT delivers to companies who make high-speed networking and computer equipment.
- nimble 13y agoEconomic value is a measure of the benefit that an economic actor can gain from either a good or service (first sentence at http://en.wikipedia.org/wiki/Value_(economics) http://en.wikipedia.org/wiki/Value_(economics) ). My post was comparing the current system that allows millisecond scale trading with a hypothetical one that slows trades down to something on the order of minutes. Your observation that people are willing to pay to exploit information asymmetries in the current framework doesn't address the question of how my proposed change would affect net economic value.
- snowwrestler 13y agoThe metric of measurement is wealth, which profits create. Your proposed change would reduce the benefit because it would eliminate the profit (wealth) that HFT firms create. Your proposed system is not hypothetical; it is how all trades used to happen. HFT did not arise from nothing. People developed it because it created new profit in addition to that generated by slower trading.
- judk 13y agoAre you seriously claiming that profits create wealth but counterparty losses don't destroy wealth???
- snowwrestler 13y agoAre you claiming that the stock market is zero sum?