5 ms·

A few points: 1) This doesn't address the front-running issue. (Where different exchanges receive the buy/sell order at a different times and HFT can abuse tho

by gizmo 13y ago

A few points: 1) This doesn't address the front-running issue. (Where different exchanges receive the buy/sell order at a different times and HFT can abuse those microsecond differences) 2) It's a universal truth that people who are better informed are harder to rip off. So that's not very persuasive. You can't reasonably expect regular people to know in which situations they'll be paying a premium for a liquidity service they may not even want. 3) It's completely fair to ask ourselves as a society if HFT groups are making a contribution to society that warrants the money they make. And if transparency with regard to HFT trading strategies leads regular people and sophisticated investors to make different decisions, then that means that the lack of transparency worked in favor of HFT. Therefore, it's reasonable to assume much of the HFT profits are just an externality. The decline of HFT is in part because investors are getting wise to the shenanigans.

Mikeb85 13y ago
No, the decline of the HFT industry is because there's so many competitors they're racing to $0...
- wglb 13y ago
  Keep in mind that many HFTs are market makers and have specific agreements with exchanges that pays them 0.005 cents per share traded, regardless. The other side of this is that they MUST stay in the market, no matter what. Thus, when trading volume went down over last few years, many HFT firms had less income. (And to answer another commenter in this thread, No, other investors are not "wise" to the ways of HFT, all traders save for the brokerage firms who used to collect $0.10 on each share traded (the spread before HFT) benefit.)
kasey_junk 13y ago
"1) This doesn't address the front-running issue. (Where different exchanges receive the buy/sell order at a different times and HFT can abuse those microsecond differences)" This is only an issue if your order is large enough to take out the entire liquidity of one of the exchanges. If that is the case, by definition you are not a retail investor, you are an institutional investor and part of the value add you are supposedly adding is your ability to operate in a complex market. "2) It's a universal truth that people who are better informed are harder to rip off. So that's not very persuasive. You can't reasonably expect regular people to know in which situations they'll be paying a premium for a liquidity service they may not even want." So informed market participants should subsidize ignorant ones? "3) It's completely fair to ask ourselves as a society if HFT groups are making a contribution to society that warrants the money they make. And if transparency with regard to HFT trading strategies leads regular people and sophisticated investors to make different decisions, then that means that the lack of transparency worked in favor of HFT. Therefore, it's reasonable to assume much of the HFT profits are just an externality. The decline of HFT is in part because investors are getting wise to the shenanigans." Agreed. We should also have that discussion around dark pool operators, hedge funds, and investment banks. While we are at it, lets talk about photo sharing websites and internet chat services as well.
- gizmo 13y ago
  1) Chris claims "The fact of the matter is that HFT’s can’t rip you off.". Front-running[1] is an example where HFT's do rip people off, simply because they didn't know it was going on. When the performance of institutional investors is harmed in this way that harms everybody with savings or a retirement fund. Not just the guys at wall street. 2) Straw man. 3) Yes, while we're at it let's change the subject to photo sharing websites instead. That sounds reasonable. Edit: [1] Again referring to the technically legal version of "front running" as used by Michael Lewis where HFT abuse buy/sell orders arriving at different times at the exchanges.
  - yummyfajitas 13y ago
    When you tell a broker "trade on my behalf" and he trades first, that's front running because he is obligated to do what's best for you. Other market participants do not have the same duty. To make an analogy: my boxing coach is obligated to give me good advice and he's a jerk if he doesn't. The other boxer is not being a jerk if he feints and then punches me in the face.
    - fauigerzigerk 13y ago
      And what if your broker routes your order through an HFT for a fee so the HFT can front-run you? That's what some say is happening. I'm still unclear if I can really believe that because it sounds so obviously illegal.
      - kasey_junk 13y ago
        That's what I was hoping Flashboys was going to be about. I haven't finished the book yet but so far Lewis mentions it in passing but doesn't dig into it.
      - yummyfajitas 13y ago
        Retail brokers often have ELP programs where an HFT has the option to fill your order (and the obligation to do so a certain fraction of the time, typically 20-50%) and avoid paying routing fees. There is little opportunity to front-run in this case since a) no one on ETrade moves large blocks b) ETrade wants to make sure the ELP program is full of benevolent market makers and c) fill rate requirements. You can always opt out of these programs (turn off "smart routing" or something similarly named), but most people don't since they typically reduce your costs.
yummyfajitas 13y ago
You can't reasonably expect regular people to know in which situations they'll be paying a premium for a liquidity If you cross the spread you paid for liquidity. If you don't know this, don't trade. Trading without understanding this is like coding without knowing what memory is. It's completely fair to ask ourselves as a society if HFT groups are making a contribution to society... The people choosing to purchase liquidity certainly seem to think they are. Their only complaint is that is that the price is not as favorable as they'd like.
- rayiner 13y ago
  Chris, I'd love to see you do a similar article on how human traders come into play in similar situations. Isn't the point of (at least some of) them also that they add liquidity? What makes HFT worse in that regard?
- klochner 13y ago
  Chris, can you at least read the NYT excerpt? I have to agree that your post does little to settle what may or may not be controversial, and it would be interesting to hear an informed response.
jarrett 13y ago
> It's completely fair to ask ourselves as a society if HFT groups are making a contribution to society that warrants the money they make. An HFT once told me his company required a huge investment to operate. Besides the infrastructure costs, the company needed cash on hand for its buy orders. Given the small profit on each trade, it needed to do many, many trades. Which necessitated a lot of buy orders, and thus a lot of cash. When all was said and done, they didn't have a particularly high return on investment. The HFT didn't give me exact numbers, but he suggested that the ballpark ROI was commensurate with that of traditional brick-and-mortar businesses. (The ROI as he quoted it counted salaries and bonuses as part of the return, so those were not disguised as costs eating away the profits.) If the HFT was telling me the truth, then it appears that at least his firm was providing a useful service and earning modest profits for doing so. Which would make his firm not so unusual in the business world. I have no inside knowledge of other HFT firms or other niches in the finance industry.
throwaway13qf85 13y ago
1) It's debatable whether you can call this behaviour "abuse". It's also debatable whether you can call it "front-running". The HFT has an advantage over the rest of the market, which is that they're faster. They're faster because they've paid for faster connections and they've hired expensive developers to build fast software. They then use that advantage to propagate information between exchanges more rapidly, so that they don't get picked off by informed traders on other exchanges. The basic mechanism is exactly the same as any other market making, it's just that it happens faster. Let's say I'm a big investor in 1960 who wants to buy 100,000 shares of MSFT (yeah, they didn't exist back then, whatever). I call up a floor broker who's standing on the trading floor at NYSE and he quotes me $49-$51 (because it's 1960 and you can drive a bus through the spread) but he can only offer me 50,000 shares. No problem, I buy from him at $51 and dial another broker at BATS in Kansas (also didn't exist in 1960) to get a quote from him too. But in the time it takes me to dial the number, the news of my trade is wired from NY to Kansas and my broker there has put his prices up in response - he now quotes me $49.50-$51.50. What the hell? I thought it was $51 to buy? Well, it was at the time I made my first trade. But when you want to make a big trade, you don't get it all at the bbo. You expect your trade to move the market. Exactly the same thing happens today, except that it all happens in milliseconds rather than minutes, and the spread is $0.01 instead of $2. Voice traders at banks and other big institutions (at least, the ones that didn't already adapt years ago) are getting hissy about it because they want to be able to buy everything at the prices they can see on the screen, regardless of liquidity considerations, and also they'd like a pony thank you very much. 2) 'Regular people' are not putting in orders that are large enough that they need to be routed to multiple exchanges. If I send an order for 100 shares of MSFT, it won't go anywhere near an exchange. It will get filled immediately, by my broker, at essentially the national bbo. 3) Yup, it's totally valid to ask these questions. In fact I think it would be great if the HFT industry was more transparent, and I fully expect that to happen. But that's not the same as saying that the market is rigged or labeling totally standard market-making behaviour as "abuse".
liricooli 13y ago
1. It׳s not front-running as nobody can actually see the order book before a transaction happened. what you describe is a sort of arbitrage based on different latencies. It may be morally wrong, but it׳s totally different from front-running.
harryh 13y ago
1) I see why the person trading a bunch of shares on different exchanges all at once is unhappy about this, but this is BETTER for literally everyone else who now benefits from more accurate pricing. 3) You're aware that HFTs simply replaced slower and more expensive humans right? These computers are a lot cheaper than the humans were and, as you said, are getting cheaper by the day. Automation FTW!

by gizmo 13y ago

Mikeb85 13y ago

No, the decline of the HFT industry is because there's so many competitors they're racing to $0...

wglb 13y ago
Keep in mind that many HFTs are market makers and have specific agreements with exchanges that pays them 0.005 cents per share traded, regardless. The other side of this is that they MUST stay in the market, no matter what. Thus, when trading volume went down over last few years, many HFT firms had less income. (And to answer another commenter in this thread, No, other investors are not "wise" to the ways of HFT, all traders save for the brokerage firms who used to collect $0.10 on each share traded (the spread before HFT) benefit.)

kasey_junk 13y ago

"1) This doesn't address the front-running issue. (Where different exchanges receive the buy/sell order at a different times and HFT can abuse those microsecond differences)" This is only an issue if your order is large enough to take out the entire liquidity of one of the exchanges. If that is the case, by definition you are not a retail investor, you are an institutional investor and part of the value add you are supposedly adding is your ability to operate in a complex market. "2) It's a universal truth that people who are better informed are harder to rip off. So that's not very persuasive. You can't reasonably expect regular people to know in which situations they'll be paying a premium for a liquidity service they may not even want." So informed market participants should subsidize ignorant ones? "3) It's completely fair to ask ourselves as a society if HFT groups are making a contribution to society that warrants the money they make. And if transparency with regard to HFT trading strategies leads regular people and sophisticated investors to make different decisions, then that means that the lack of transparency worked in favor of HFT. Therefore, it's reasonable to assume much of the HFT profits are just an externality. The decline of HFT is in part because investors are getting wise to the shenanigans." Agreed. We should also have that discussion around dark pool operators, hedge funds, and investment banks. While we are at it, lets talk about photo sharing websites and internet chat services as well.

gizmo 13y ago
1) Chris claims "The fact of the matter is that HFT’s can’t rip you off.". Front-running[1] is an example where HFT's do rip people off, simply because they didn't know it was going on. When the performance of institutional investors is harmed in this way that harms everybody with savings or a retirement fund. Not just the guys at wall street. 2) Straw man. 3) Yes, while we're at it let's change the subject to photo sharing websites instead. That sounds reasonable. Edit: [1] Again referring to the technically legal version of "front running" as used by Michael Lewis where HFT abuse buy/sell orders arriving at different times at the exchanges.
- yummyfajitas 13y ago
  When you tell a broker "trade on my behalf" and he trades first, that's front running because he is obligated to do what's best for you. Other market participants do not have the same duty. To make an analogy: my boxing coach is obligated to give me good advice and he's a jerk if he doesn't. The other boxer is not being a jerk if he feints and then punches me in the face.
  - fauigerzigerk 13y ago
    And what if your broker routes your order through an HFT for a fee so the HFT can front-run you? That's what some say is happening. I'm still unclear if I can really believe that because it sounds so obviously illegal.
    - kasey_junk 13y ago
      That's what I was hoping Flashboys was going to be about. I haven't finished the book yet but so far Lewis mentions it in passing but doesn't dig into it.
    - yummyfajitas 13y ago
      Retail brokers often have ELP programs where an HFT has the option to fill your order (and the obligation to do so a certain fraction of the time, typically 20-50%) and avoid paying routing fees. There is little opportunity to front-run in this case since a) no one on ETrade moves large blocks b) ETrade wants to make sure the ELP program is full of benevolent market makers and c) fill rate requirements. You can always opt out of these programs (turn off "smart routing" or something similarly named), but most people don't since they typically reduce your costs.

yummyfajitas 13y ago

You can't reasonably expect regular people to know in which situations they'll be paying a premium for a liquidity If you cross the spread you paid for liquidity. If you don't know this, don't trade. Trading without understanding this is like coding without knowing what memory is. It's completely fair to ask ourselves as a society if HFT groups are making a contribution to society... The people choosing to purchase liquidity certainly seem to think they are. Their only complaint is that is that the price is not as favorable as they'd like.

rayiner 13y ago
Chris, I'd love to see you do a similar article on how human traders come into play in similar situations. Isn't the point of (at least some of) them also that they add liquidity? What makes HFT worse in that regard?
klochner 13y ago
Chris, can you at least read the NYT excerpt? I have to agree that your post does little to settle what may or may not be controversial, and it would be interesting to hear an informed response.

jarrett 13y ago

> It's completely fair to ask ourselves as a society if HFT groups are making a contribution to society that warrants the money they make. An HFT once told me his company required a huge investment to operate. Besides the infrastructure costs, the company needed cash on hand for its buy orders. Given the small profit on each trade, it needed to do many, many trades. Which necessitated a lot of buy orders, and thus a lot of cash. When all was said and done, they didn't have a particularly high return on investment. The HFT didn't give me exact numbers, but he suggested that the ballpark ROI was commensurate with that of traditional brick-and-mortar businesses. (The ROI as he quoted it counted salaries and bonuses as part of the return, so those were not disguised as costs eating away the profits.) If the HFT was telling me the truth, then it appears that at least his firm was providing a useful service and earning modest profits for doing so. Which would make his firm not so unusual in the business world. I have no inside knowledge of other HFT firms or other niches in the finance industry.

throwaway13qf85 13y ago

1) It's debatable whether you can call this behaviour "abuse". It's also debatable whether you can call it "front-running". The HFT has an advantage over the rest of the market, which is that they're faster. They're faster because they've paid for faster connections and they've hired expensive developers to build fast software. They then use that advantage to propagate information between exchanges more rapidly, so that they don't get picked off by informed traders on other exchanges. The basic mechanism is exactly the same as any other market making, it's just that it happens faster. Let's say I'm a big investor in 1960 who wants to buy 100,000 shares of MSFT (yeah, they didn't exist back then, whatever). I call up a floor broker who's standing on the trading floor at NYSE and he quotes me $49-$51 (because it's 1960 and you can drive a bus through the spread) but he can only offer me 50,000 shares. No problem, I buy from him at $51 and dial another broker at BATS in Kansas (also didn't exist in 1960) to get a quote from him too. But in the time it takes me to dial the number, the news of my trade is wired from NY to Kansas and my broker there has put his prices up in response - he now quotes me $49.50-$51.50. What the hell? I thought it was $51 to buy? Well, it was at the time I made my first trade. But when you want to make a big trade, you don't get it all at the bbo. You expect your trade to move the market. Exactly the same thing happens today, except that it all happens in milliseconds rather than minutes, and the spread is $0.01 instead of $2. Voice traders at banks and other big institutions (at least, the ones that didn't already adapt years ago) are getting hissy about it because they want to be able to buy everything at the prices they can see on the screen, regardless of liquidity considerations, and also they'd like a pony thank you very much. 2) 'Regular people' are not putting in orders that are large enough that they need to be routed to multiple exchanges. If I send an order for 100 shares of MSFT, it won't go anywhere near an exchange. It will get filled immediately, by my broker, at essentially the national bbo. 3) Yup, it's totally valid to ask these questions. In fact I think it would be great if the HFT industry was more transparent, and I fully expect that to happen. But that's not the same as saying that the market is rigged or labeling totally standard market-making behaviour as "abuse".

liricooli 13y ago

1. It׳s not front-running as nobody can actually see the order book before a transaction happened. what you describe is a sort of arbitrage based on different latencies. It may be morally wrong, but it׳s totally different from front-running.

harryh 13y ago

1) I see why the person trading a bunch of shares on different exchanges all at once is unhappy about this, but this is BETTER for literally everyone else who now benefits from more accurate pricing. 3) You're aware that HFTs simply replaced slower and more expensive humans right? These computers are a lot cheaper than the humans were and, as you said, are getting cheaper by the day. Automation FTW!