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The argument in favor of HFT is that it both increases liquidity of markets and reduces the spread - both favorable to most investors. But they can actually se

The argument in favor of HFT is that it both increases liquidity of markets and reduces the spread - both favorable to most investors. But they can actually see you attempting to buy stock, step in front of you, buy it before you, and then try to resell it to you for a higher price? That's bad behavior and reduces confidence in the free market. There needs to be regulation around things like that.

kasey_junk 13y ago
The idea that an HFT can see you attempt to buy stock before it goes to the market is not true and would be against the law if it happened.
- unreal37 13y ago
  It seems like it isn't against the law. The thing is, there are multiple markets not just one. So when you place an order to buy 100 shares of IBM, that order gets sent to many places to try to find the best offer to fill you. If a HFT can see you submit that order to 1 market, and then beat you to the other 4 markets and buy up all the shares before you, that's frontrunning. That would be illegal if your broker did it, but HFT is not your broker, and just has the advantage of being faster than your broker. What makes you say it's "not true"? What evidence do you have of that?
  - kasey_junk 13y ago
    There are lots of things you are glossing over that complicate this picture quite a bit (like the fact that your broker is almost certainly executing on an HFT platform), but the biggest issue here is that no one can see your order until you place it on the first market. Once that order hits the market it is public signalling data that should impact the prices on every other market. That some traders are more efficient at responding to that public signalling data than others is not an issue and in fact is a large part of why the markets are as efficient as they are.
    - foobarqux 13y ago
      Flashed orders make it a bit more complicated than you suggest.
      - kasey_junk 13y ago
        As does purchased order flow, internal matching, preferred routing agreements, dark pools etc. But given the simplistic nature of the discussion it is more accurate to say that in general HFT don't see your order before it hits the market than it is to say they do.
        foobarqux 13y ago
        Okay, as long as people who actually want to understand the issue know that in many cases HFT firms can actually see orders before they become public although they don't actually do much to disadvantage a retail trader.
- michaelt 13y ago
  Katsuyama realized that his orders traveled along fiber optic lines and hit the closest exchange first, where high frequency traders would get a glimpse, and then use their speed advantage to beat him to the other 12 U.S. public exchanges and 45 private trading venues. HFT algorithms could then buy the shares Katsuyama wanted, and then sell them to him at a slightly higher price. [1] I don't know if this is illegal or not, but I'll eat my hat if anyone gets prosecuted. [1] http://www.reuters.com/article/2014/03/31/us-markets-hft-flashboys-idUSBREA2U03D20140331 http://www.reuters.com/article/2014/03/31/us-markets-hft-fla...
  - kasey_junk 13y ago
    What is being described in this article is latency arbitrage and is not illegal. You will notice it specifically mentions that his order was changing the price on other exchanges, not on the exchange he submitted his order to. He was taking advantage of multiple exchanges in order to hide his order flow, because as a natural consequence of market laws large orders move prices. He is just upset that other folks were better at finding his order flow than he was at hiding it.
    - 001sky 13y ago
      What is being described in this article is [regulatory] arbitrage and is not illegal FTFY
      - andylei 13y ago
        no, its not regulatory arbitrage. its latency arbitrage.
        001sky 13y ago
        "A practice whereby firms capitalize on loopholes in regulatory systems in order to circumvent unfavorable regulation." Same shit.
        deleted 13y ago
- mycousinvinny 13y ago
  Kasey- Do you just make shit up or actually look at the source before vomiting on the keyboard?
- joezydeco 13y ago
  Just had drinks over the weekend with a friend that works IT for a major exchange in the midwest. He was telling me how they set up the network interconnect cables from their trading systems to the co-located brokers. They are measured to be identical to the millimeter to satisfy all the high-speed brokers that want to sit next to the exchange and avoid any argument about who can get in quicker.
  - kasey_junk 13y ago
    Yes and providing identical service levels to all co-located participants is a major profit center for exchanges now. Before that change in the market there was a whole class of consultant that would claim they could find specific racks in colo data centers that would give you latency edge. But this latency is not about seeing other peoples orders before they enter the market, it is about reacting to market data quickly as it is disseminated to everyone.
josho 13y ago
I don't understand how HFT increases liquidity, this Q/A[1] is a start at an answer. My conclusion is that yes HFT probably does increase liquidity at the expense of adding a tax on many of the transactions. Except this tax does nothing else to help the markets except to further feed the beast (profits) of companies running HFT. So the real question to ask is: does a marginal increase in liquidity outweigh the financial cost? I'd argue that it is a tax on society with no real benefit. I've started to hear about auction's to improve the markets which is interesting and saves us from the millions (billions?) of dollars that HFTs pocket for themselves. [1] http://quant.stackexchange.com/questions/1658/has-high-frequency-trading-hft-been-a-net-benefit-or-cost-to-society http://quant.stackexchange.com/questions/1658/has-high-frequ...
- kasey_junk 13y ago
  It's not just increased liquidity, it's also a decrease in the bid/ask spread, which is the actual cost of purchasing. HFT drives those much lower, decreasing the cost for most participants.
  - josho 13y ago
    Genuine question, how does it decrease the spread? Let's simplify this: I have a stock to sell, I'm asking $100, you want to buy and offer $95. How does a HFT decrease the spread while keeping a portion of the transaction itself as profit?
    - kasey_junk 13y ago
      We need to introduce 2 new players. Sally who has some of this stock that she needs to sell for as much as she can get and Bob who wants to buy some of this stock for as little as he has to pay. In the current market Sally gets $95 per share and Bob has to pay $100. Matt looks at the bid ask spread and decides it would be profitable to make a market in that stock. So he simultaneously asks at $99.99 and bids at $95.01. If Sally and Bob were to come back now they each would get a better deal and Matt would make $4.98 on the deal. For Matt to continue doing this that $4.98 needs to cover the risks he is taking, his operational costs, and some profit. An HFT is much more efficient at this than Matt driving down the operational cost & potentially calculating the risk more accurately.
harryh 13y ago
No, they cannot actually see you attempting to buy stock and step in front of you. That's not true.
- deleted 13y ago
  [deleted]
- adambratt 13y ago
  Yes, they can and it's called buying dumb flow from brokerages. Now technically they write it off as helping you as they group small orders together and execute them, but that doesn't mean these market makers are making a profit off the transaction.
- foobarqux 13y ago
  They sort of can with flashed orders.

kasey_junk 13y ago

The idea that an HFT can see you attempt to buy stock before it goes to the market is not true and would be against the law if it happened.

unreal37 13y ago
It seems like it isn't against the law. The thing is, there are multiple markets not just one. So when you place an order to buy 100 shares of IBM, that order gets sent to many places to try to find the best offer to fill you. If a HFT can see you submit that order to 1 market, and then beat you to the other 4 markets and buy up all the shares before you, that's frontrunning. That would be illegal if your broker did it, but HFT is not your broker, and just has the advantage of being faster than your broker. What makes you say it's "not true"? What evidence do you have of that?
- kasey_junk 13y ago
  There are lots of things you are glossing over that complicate this picture quite a bit (like the fact that your broker is almost certainly executing on an HFT platform), but the biggest issue here is that no one can see your order until you place it on the first market. Once that order hits the market it is public signalling data that should impact the prices on every other market. That some traders are more efficient at responding to that public signalling data than others is not an issue and in fact is a large part of why the markets are as efficient as they are.
  - foobarqux 13y ago
    Flashed orders make it a bit more complicated than you suggest.
    - kasey_junk 13y ago
      As does purchased order flow, internal matching, preferred routing agreements, dark pools etc. But given the simplistic nature of the discussion it is more accurate to say that in general HFT don't see your order before it hits the market than it is to say they do.
      - foobarqux 13y ago
        Okay, as long as people who actually want to understand the issue know that in many cases HFT firms can actually see orders before they become public although they don't actually do much to disadvantage a retail trader.
michaelt 13y ago
Katsuyama realized that his orders traveled along fiber optic lines and hit the closest exchange first, where high frequency traders would get a glimpse, and then use their speed advantage to beat him to the other 12 U.S. public exchanges and 45 private trading venues. HFT algorithms could then buy the shares Katsuyama wanted, and then sell them to him at a slightly higher price. [1] I don't know if this is illegal or not, but I'll eat my hat if anyone gets prosecuted. [1] http://www.reuters.com/article/2014/03/31/us-markets-hft-flashboys-idUSBREA2U03D20140331 http://www.reuters.com/article/2014/03/31/us-markets-hft-fla...
- kasey_junk 13y ago
  What is being described in this article is latency arbitrage and is not illegal. You will notice it specifically mentions that his order was changing the price on other exchanges, not on the exchange he submitted his order to. He was taking advantage of multiple exchanges in order to hide his order flow, because as a natural consequence of market laws large orders move prices. He is just upset that other folks were better at finding his order flow than he was at hiding it.
  - 001sky 13y ago
    What is being described in this article is [regulatory] arbitrage and is not illegal FTFY
    - andylei 13y ago
      no, its not regulatory arbitrage. its latency arbitrage.
      - 001sky 13y ago
        "A practice whereby firms capitalize on loopholes in regulatory systems in order to circumvent unfavorable regulation." Same shit.
        deleted 13y ago
mycousinvinny 13y ago
Kasey- Do you just make shit up or actually look at the source before vomiting on the keyboard?
joezydeco 13y ago
Just had drinks over the weekend with a friend that works IT for a major exchange in the midwest. He was telling me how they set up the network interconnect cables from their trading systems to the co-located brokers. They are measured to be identical to the millimeter to satisfy all the high-speed brokers that want to sit next to the exchange and avoid any argument about who can get in quicker.
- kasey_junk 13y ago
  Yes and providing identical service levels to all co-located participants is a major profit center for exchanges now. Before that change in the market there was a whole class of consultant that would claim they could find specific racks in colo data centers that would give you latency edge. But this latency is not about seeing other peoples orders before they enter the market, it is about reacting to market data quickly as it is disseminated to everyone.

josho 13y ago

I don't understand how HFT increases liquidity, this Q/A[1] is a start at an answer. My conclusion is that yes HFT probably does increase liquidity at the expense of adding a tax on many of the transactions. Except this tax does nothing else to help the markets except to further feed the beast (profits) of companies running HFT. So the real question to ask is: does a marginal increase in liquidity outweigh the financial cost? I'd argue that it is a tax on society with no real benefit. I've started to hear about auction's to improve the markets which is interesting and saves us from the millions (billions?) of dollars that HFTs pocket for themselves. [1] http://quant.stackexchange.com/questions/1658/has-high-frequency-trading-hft-been-a-net-benefit-or-cost-to-society http://quant.stackexchange.com/questions/1658/has-high-frequ...

kasey_junk 13y ago
It's not just increased liquidity, it's also a decrease in the bid/ask spread, which is the actual cost of purchasing. HFT drives those much lower, decreasing the cost for most participants.
- josho 13y ago
  Genuine question, how does it decrease the spread? Let's simplify this: I have a stock to sell, I'm asking $100, you want to buy and offer $95. How does a HFT decrease the spread while keeping a portion of the transaction itself as profit?
  - kasey_junk 13y ago
    We need to introduce 2 new players. Sally who has some of this stock that she needs to sell for as much as she can get and Bob who wants to buy some of this stock for as little as he has to pay. In the current market Sally gets $95 per share and Bob has to pay $100. Matt looks at the bid ask spread and decides it would be profitable to make a market in that stock. So he simultaneously asks at $99.99 and bids at $95.01. If Sally and Bob were to come back now they each would get a better deal and Matt would make $4.98 on the deal. For Matt to continue doing this that $4.98 needs to cover the risks he is taking, his operational costs, and some profit. An HFT is much more efficient at this than Matt driving down the operational cost & potentially calculating the risk more accurately.

harryh 13y ago

No, they cannot actually see you attempting to buy stock and step in front of you. That's not true.

deleted 13y ago
[deleted]
adambratt 13y ago
Yes, they can and it's called buying dumb flow from brokerages. Now technically they write it off as helping you as they group small orders together and execute them, but that doesn't mean these market makers are making a profit off the transaction.
foobarqux 13y ago
They sort of can with flashed orders.