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> there are also many who genuinely believe that they are doing a service for the market You make it sounds like HFT is some sort of non-profit, community serv

> there are also many who genuinely believe that they are doing a service for the market You make it sounds like HFT is some sort of non-profit, community service vocation, like teaching, or fire fighters. Do people actually think this? Regardless of the merits of HFT, that kind of argument seems very disingenuous. I haven't met a single person engaged in HFT who is doing it to smooth the function of the market or "provide liquidity". They may think it has that effect, but no one is in it for that reason. If anything, it's what they tell themselves to justify skimming money from the other market participants.

lmm 13y ago
> You make it sounds like HFT is some sort of non-profit, community service vocation, like teaching, or fire fighters. Do people actually think this? They're doing it to make money, but that doesn't mean they're not helping other people out. My uncle is an importer; most of his time is spent finding something that's cheaper in Korea than it is here and drawing up a contract with a supplier there and a buyer here. Does he do it as a community service? No. Does he take his cut? Yes. But every deal he makes benefits both the supplier and the buyer.
tptacek 13y ago
You can replace the letters "HFT" in your comment with "any market maker" and come to exactly the same conclusion. Liquidity has always, always been subsidized by "skimming". The rake market makers take from trades is the cost of liquidity: ie, of being able to buy shares immediately without getting shafted because the only orders on the market are from large traders who are holding out for very high prices. Have you ever tried to sell a house? That's what crappy liquidity looks like: there are buyers and there are sellers, but nobody is anywhere near agreeing about the price of the goods being traded, and so it takes months to get in or out of a position, and you sometimes have to do it at extremely unfavorable prices.
- danielnaab 13y ago
  The problem is that market making is different than the critique, which is that having privileged access to exchange data centers is an unfair advantage that allows rent-seeking. To access information before the general public allows traders to inject themselves into transactions that don't require a market maker. That fact that no one will defend this practice while vehemently defending "HFT" speaks to an impedance mismatch. We're not talking about the same thing.
  - harryh 13y ago
    They have faster access to exchange data centers because they paid for it. Anyone can pay for this access. They use this privileged access to provide faster and cheaper service to their customers (purchasers of liquidity). It's no different than McDonalds paying a lot of money to buy a prime corner location to build one of their restaurants.
    - danielnaab 13y ago
      You can pay for a lot of things, but that doesn't mean it's in the interest of society or the market as a whole. You don't require faster access to provide liquidity, but it sure helps with arbitraging trading activity.
      - tptacek 13y ago
        You can pay for a lot of things and that doesn't mean it's not in the interest of society or the market as a whole either. The trading in any one instrument on an exchange is a zero-sum game, but the structure of the market and the relationship between exchanges, buy-side firms, sell-side firms, and retail investors doesn't have to be. Before electronic trading, the specialists who executed orders on the NYSE floor ALSO paid shitloads of money for their access. One difference between today and the heyday of the specialist system is that in the specialist system, middlemen skimmed overtly from investors: the bid-ask spread was gigantic, and all that money went to the middlemen.
        13y ago
- patrickg_zill 13y ago
  One of the quotes either from the book, or one of the TV interviews, was "if it is illegal if a human does it, why is it not illegal if a machine does it"? I think it is from an interview on The Daily Show, see here: http://www.zerohedge.com/news/2014-04-02/jon-stewart-hft-its-not-american-its-not-even-capitalism-its-cheating http://www.zerohedge.com/news/2014-04-02/jon-stewart-hft-its... The quote seems to be 'The HFTs "function on volume and volatility" alone and "they know the prices before you do... which is illegal if it's a person, but as a computer, meh?"' So my question to you is, i) explain how HFT serves the same purpose as market-making ii) explain how HFT is not front-running the valid trades
  - tptacek 13y ago
    That quote drives me nuts, because it is completely unclear on how anything that computers are doing would be illegal if humans did it. For decades, humans did exactly what the HFTs did, except much more brazenly: where HFTs take pennies in compensation, the humans took dimes, quarters, even dollars. That premium wasn't outlawed. No rule was passed to eliminate the profits the middlemen took. No, the premiums were competed down to where they are now. (I didn't downvote you).
    - throwawaay 13y ago
      While it's true that increased competition among market makers have driven spreads down, decimalization was also a factor. For example: http://www.sec.gov/news/testimony/052401tslu.htm "For example, OEA estimates that, from December 2000 to March 2001, quotation spreads in securities listed on the New York Stock Exchange ("NYSE") narrowed an average of 37%, and effective spreads narrowed 15%. An even more dramatic reduction in quotation spreads was observed in Nasdaq securities, with spreads narrowing an average of 50% following decimalization, and effective spreads narrowing almost as much." Technically, that's an example of a rule that was passed to eliminate the middlemen's profits.
    - ericd 13y ago
      Are the HFTs actually marketmaking, though? Lewis is accusing them of front-running transactions that were already possible, driving up the price slightly of transactions that were already going to happen based on telegraphed intent. This is different from what an actual market maker does, which is provide a counterparty for all transactions and hedge their resulting risk, in exchange for the spread. EDIT: Perhaps this is just a small piece of what HFTs do, and maybe it's limited to a few bad actors, but being blown out of proportion by the book?
- declan 13y ago
  >You can replace the letters "HFT" in your comment with "any market maker" and come to exactly the same conclusion. You may even be able to replace the letters HTF with "any for-profit profession" and come to exactly the same conclusion. I think it's fair to assume the HFT traders are rapacious capitalists (as someone who is pro-free market, this doesn't exactly offend me). But motivations don't matter here. It reminds me of the Adam Smith quote, which may only make sense if you've read the linked Scott Locklin essay first: http://www.econlib.org/library/Enc/bios/Smith.html http://www.econlib.org/library/Enc/bios/Smith.html "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest..."
- msandford 13y ago
  OK but if the HFT traders only hold stocks for say a few seconds (or milliseconds) then that means that there is plenty of real liquidity to be had and thus HFT isn't adding value. It's adding volume, but not value. If the HFT guys are willing to hold stocks for minutes or hours or days then yeah I might concede that they're adding liquidity. From what I understand that's not HFT anymore. But for a second? I can wait an extra second for an order to get filled.
  - harryh 13y ago
    You can wait an extra second and maybe get it filled. Or maybe the price will move away from you and you'll never get filled (at least at the price you want).
sseveran 13y ago
If teaching were as competitive as market making major cities might graduate more than half their students from high school while simultaneously driving down costs. Non profit is not a badge of honor.
- smoorman1024 13y ago
  Yes. Kind of a good example how competitive systems lead to a better end result for customers. Competitive teaching is something we should actually encourage. Tyler Cowen often argues how the availability of systems to teach to a huge number of students is going to make teaching superstars and bring the cost of teaching down to almost zero because the marginal cost of distributing teaching is almost 0 with enough students.
- panzagl 13y ago
  Teaching is plenty competitive- starting teacher salaries are low because there's lots of competition. If you want results though, you have to pay.
- gshubert17 13y ago
  If more students and their families in major cities understood the benefits of learning in high school and were able and motivated to pursue them -- that is, if being knowledgeable were a badge of honor -- would schools be more likely to respond to them, with an ultimate result of higher graduation rates?
- steveax 13y ago
  Yes of course. All markets are the same. High frequency teachers FTW!
pash 13y ago
"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." Adam Smith's insight helped launched the enterprise of modern economics because it turned out attention to what matters: results. Benevolence, like self-interest, is neither necessary nor sufficient to produce a social benefit. So you're right: the motivations of high-frequency traders are irrelevant, except insofar as we can change their behavior by changing the incentives they respond to.

lmm 13y ago

> You make it sounds like HFT is some sort of non-profit, community service vocation, like teaching, or fire fighters. Do people actually think this? They're doing it to make money, but that doesn't mean they're not helping other people out. My uncle is an importer; most of his time is spent finding something that's cheaper in Korea than it is here and drawing up a contract with a supplier there and a buyer here. Does he do it as a community service? No. Does he take his cut? Yes. But every deal he makes benefits both the supplier and the buyer.

tptacek 13y ago

You can replace the letters "HFT" in your comment with "any market maker" and come to exactly the same conclusion. Liquidity has always, always been subsidized by "skimming". The rake market makers take from trades is the cost of liquidity: ie, of being able to buy shares immediately without getting shafted because the only orders on the market are from large traders who are holding out for very high prices. Have you ever tried to sell a house? That's what crappy liquidity looks like: there are buyers and there are sellers, but nobody is anywhere near agreeing about the price of the goods being traded, and so it takes months to get in or out of a position, and you sometimes have to do it at extremely unfavorable prices.

danielnaab 13y ago
The problem is that market making is different than the critique, which is that having privileged access to exchange data centers is an unfair advantage that allows rent-seeking. To access information before the general public allows traders to inject themselves into transactions that don't require a market maker. That fact that no one will defend this practice while vehemently defending "HFT" speaks to an impedance mismatch. We're not talking about the same thing.
- harryh 13y ago
  They have faster access to exchange data centers because they paid for it. Anyone can pay for this access. They use this privileged access to provide faster and cheaper service to their customers (purchasers of liquidity). It's no different than McDonalds paying a lot of money to buy a prime corner location to build one of their restaurants.
  - danielnaab 13y ago
    You can pay for a lot of things, but that doesn't mean it's in the interest of society or the market as a whole. You don't require faster access to provide liquidity, but it sure helps with arbitraging trading activity.
    - tptacek 13y ago
      You can pay for a lot of things and that doesn't mean it's not in the interest of society or the market as a whole either. The trading in any one instrument on an exchange is a zero-sum game, but the structure of the market and the relationship between exchanges, buy-side firms, sell-side firms, and retail investors doesn't have to be. Before electronic trading, the specialists who executed orders on the NYSE floor ALSO paid shitloads of money for their access. One difference between today and the heyday of the specialist system is that in the specialist system, middlemen skimmed overtly from investors: the bid-ask spread was gigantic, and all that money went to the middlemen.
      - 13y ago
patrickg_zill 13y ago
One of the quotes either from the book, or one of the TV interviews, was "if it is illegal if a human does it, why is it not illegal if a machine does it"? I think it is from an interview on The Daily Show, see here: http://www.zerohedge.com/news/2014-04-02/jon-stewart-hft-its-not-american-its-not-even-capitalism-its-cheating http://www.zerohedge.com/news/2014-04-02/jon-stewart-hft-its... The quote seems to be 'The HFTs "function on volume and volatility" alone and "they know the prices before you do... which is illegal if it's a person, but as a computer, meh?"' So my question to you is, i) explain how HFT serves the same purpose as market-making ii) explain how HFT is not front-running the valid trades
- tptacek 13y ago
  That quote drives me nuts, because it is completely unclear on how anything that computers are doing would be illegal if humans did it. For decades, humans did exactly what the HFTs did, except much more brazenly: where HFTs take pennies in compensation, the humans took dimes, quarters, even dollars. That premium wasn't outlawed. No rule was passed to eliminate the profits the middlemen took. No, the premiums were competed down to where they are now. (I didn't downvote you).
  - throwawaay 13y ago
    While it's true that increased competition among market makers have driven spreads down, decimalization was also a factor. For example: http://www.sec.gov/news/testimony/052401tslu.htm "For example, OEA estimates that, from December 2000 to March 2001, quotation spreads in securities listed on the New York Stock Exchange ("NYSE") narrowed an average of 37%, and effective spreads narrowed 15%. An even more dramatic reduction in quotation spreads was observed in Nasdaq securities, with spreads narrowing an average of 50% following decimalization, and effective spreads narrowing almost as much." Technically, that's an example of a rule that was passed to eliminate the middlemen's profits.
  - ericd 13y ago
    Are the HFTs actually marketmaking, though? Lewis is accusing them of front-running transactions that were already possible, driving up the price slightly of transactions that were already going to happen based on telegraphed intent. This is different from what an actual market maker does, which is provide a counterparty for all transactions and hedge their resulting risk, in exchange for the spread. EDIT: Perhaps this is just a small piece of what HFTs do, and maybe it's limited to a few bad actors, but being blown out of proportion by the book?
declan 13y ago
>You can replace the letters "HFT" in your comment with "any market maker" and come to exactly the same conclusion. You may even be able to replace the letters HTF with "any for-profit profession" and come to exactly the same conclusion. I think it's fair to assume the HFT traders are rapacious capitalists (as someone who is pro-free market, this doesn't exactly offend me). But motivations don't matter here. It reminds me of the Adam Smith quote, which may only make sense if you've read the linked Scott Locklin essay first: http://www.econlib.org/library/Enc/bios/Smith.html http://www.econlib.org/library/Enc/bios/Smith.html "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest..."
msandford 13y ago
OK but if the HFT traders only hold stocks for say a few seconds (or milliseconds) then that means that there is plenty of real liquidity to be had and thus HFT isn't adding value. It's adding volume, but not value. If the HFT guys are willing to hold stocks for minutes or hours or days then yeah I might concede that they're adding liquidity. From what I understand that's not HFT anymore. But for a second? I can wait an extra second for an order to get filled.
- harryh 13y ago
  You can wait an extra second and maybe get it filled. Or maybe the price will move away from you and you'll never get filled (at least at the price you want).

sseveran 13y ago

If teaching were as competitive as market making major cities might graduate more than half their students from high school while simultaneously driving down costs. Non profit is not a badge of honor.

smoorman1024 13y ago
Yes. Kind of a good example how competitive systems lead to a better end result for customers. Competitive teaching is something we should actually encourage. Tyler Cowen often argues how the availability of systems to teach to a huge number of students is going to make teaching superstars and bring the cost of teaching down to almost zero because the marginal cost of distributing teaching is almost 0 with enough students.
panzagl 13y ago
Teaching is plenty competitive- starting teacher salaries are low because there's lots of competition. If you want results though, you have to pay.
gshubert17 13y ago
If more students and their families in major cities understood the benefits of learning in high school and were able and motivated to pursue them -- that is, if being knowledgeable were a badge of honor -- would schools be more likely to respond to them, with an ultimate result of higher graduation rates?
steveax 13y ago
Yes of course. All markets are the same. High frequency teachers FTW!

pash 13y ago

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." Adam Smith's insight helped launched the enterprise of modern economics because it turned out attention to what matters: results. Benevolence, like self-interest, is neither necessary nor sufficient to produce a social benefit. So you're right: the motivations of high-frequency traders are irrelevant, except insofar as we can change their behavior by changing the incentives they respond to.