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I don't understand how high frequency trading could be considered beneficial. In the article's example, HFT captures some profit from an unknown trend simply b
by ynniv 17y ago
I don't understand how high frequency trading could be considered beneficial. In the article's example, HFT captures some profit from an unknown trend simply by being faster than the traditional participants. This directly benefits those who can get their software closest to the servers running the markets, to which the average person is limited. Insiders like Goldman Sachs can run their software directly on the routers connecting the markets, and thus benefit from insider access to a natural monopoly on speed.
To be clear, this has nothing to do with algorithmic trading. Using computers to detect trends or to plan strategic trades is natural and healthy for the market. I am also not suggesting that computerized trading and reduced fees are bad - they have made the market far more efficient.
> One could easily say the Broadcom buyers described were upset they couldn't screw the sellers as badly anymore.
But in this case, the Broadcom sellers AND buyers were both screwed by a third party, who bought at a price that hurt sellers and sold at a price that hurt buyers, on the order of milliseconds. This third party runs the same scheme all day, every day, taking money out of everyone's pocket without doing any real work. This is why people would distrust the market.
- tptacek 17y agoIt's the same benefit as normal traders provide: by constantly trading, HFT engines are providing liquidity and cutting the bid/ask spread. The "unfairness" here is limited to other traders who'd be trying to profit by selling the same liquidity, and now can't compete. But your occasional market order benefits.
- ynniv 17y agoHow does this HFT practice provide additional liquidity? The only time they purchase shares is right before someone else is going to. It is the ultimate man in the middle, taking a little bit of every single transaction in an exchange. It raises the cost of doing business for everyone (except the HFT trader), and is a net inefficiency in the system, like energy lost to heat in a poor electrical conductor.
- tptacek 17y agoI know a little bit about trading, a decent bit about trading platforms, and not a lot about HFT in particular, but it was not my impression that HFT algos can literally MITM the market. They buy when they detect changes in demand.
- paulgb 17y agoI'm not sure MITM is accurate, but the article's graphic seems to imply that the machines have access to the trades before they are executed. http://www.nytimes.com/imagepages/2009/07/24/business/0724-webBIZ-trading.ready.html http://www.nytimes.com/imagepages/2009/07/24/business/0724-w...
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- joezydeco 17y agoI don't consider it an inefficiency as much as a parasitic loss. All those man-in-the-middle fragments are being scooped up and funneled to one entity.
- ggruschow 17y agoYou seem to be taking the article's statements as facts and treating the story as a representative subsample. I don't think either is the case. Most high-frequency trading provides liquidity to a market, not takes it, especially in US stocks. That way, you not only possibly get some edge from the bid/ask spread, you also may collect "liquidity rebates" (see http://www.batstrading.com/FeeSchedule http://www.batstrading.com/FeeSchedule for one fee schedule for an exchange that's actually founded by some high-frequency traders). There's tons of high-frequency trading that's actually gross negative (they sell for less on average than they buy), but net positive (on average, they get paid more fees than they lose gross).