7 ms·

Except that they're paying money (both to the exchange, for privileged access to the low-latency data, and to their own employees/vendors for their software and

Except that they're paying money (both to the exchange, for privileged access to the low-latency data, and to their own employees/vendors for their software and hardware) to be the ones who pocket that $0.30/share surplus. That's rent-seeking, and from the point of view of the economy as a whole it is a deadweight loss. The resources used on HFT could have gone toward creating wealth, rather than generating a zero-sum transfer from one market participant to another.

kevinpet 17y ago
Thank you. I had been a little "hmm...that seems fishy but I can't put my finger on it", but your analysis gives the missing piece.
tptacek 17y ago
Aren't the HF traders exposing themselves to price risk, creating more opportunities for sellers to sell and buyers to buy, and narrowing the bid-ask spread?
- mbrubeck 17y ago
  Yes, that's a good point - and both my criticism and your rebuttal could be applied to any number of professional traders, not just HFT systems. I was mainly focused on this claim from the New York Times article: "A loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee." If true, this means that the HFT operators are not necessarily taking on the normal level of price risk, and their incentives aren't necessarily aligned with efficiency as they would be in a neutral market. And the point I should have made is that most of our market regulations are not about efficiency, but about more specific ideas of fairness or transparency. For example, insider trading does not introduce inefficiency into a market, but it's regulated nevertheless.
- BrentRitterbeck 17y ago
  There's a whole slew of strategies used by these people. There are a lot of strategies used just to find out what other strategies are being used. People are paid big bucks to develop new strategies that hide what the trader's intentions are. This is a very difficult thing to do, and that is why the salaries are so large.
gaius 17y ago
I'm not sure how that's zero-sum. There's value in a) liquidity and b) the exchange existing at all. If the exchange didn't get "rent" how could it function?

kevinpet 17y ago

Thank you. I had been a little "hmm...that seems fishy but I can't put my finger on it", but your analysis gives the missing piece.

tptacek 17y ago

Aren't the HF traders exposing themselves to price risk, creating more opportunities for sellers to sell and buyers to buy, and narrowing the bid-ask spread?

mbrubeck 17y ago
Yes, that's a good point - and both my criticism and your rebuttal could be applied to any number of professional traders, not just HFT systems. I was mainly focused on this claim from the New York Times article: "A loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee." If true, this means that the HFT operators are not necessarily taking on the normal level of price risk, and their incentives aren't necessarily aligned with efficiency as they would be in a neutral market. And the point I should have made is that most of our market regulations are not about efficiency, but about more specific ideas of fairness or transparency. For example, insider trading does not introduce inefficiency into a market, but it's regulated nevertheless.
BrentRitterbeck 17y ago
There's a whole slew of strategies used by these people. There are a lot of strategies used just to find out what other strategies are being used. People are paid big bucks to develop new strategies that hide what the trader's intentions are. This is a very difficult thing to do, and that is why the salaries are so large.

gaius 17y ago

I'm not sure how that's zero-sum. There's value in a) liquidity and b) the exchange existing at all. If the exchange didn't get "rent" how could it function?