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>(not to mention that that "liquidity" and "efficiency" arguments fall flat -- the types of HFT schemes being described here work only by creating artificial il

>(not to mention that that "liquidity" and "efficiency" arguments fall flat -- the types of HFT schemes being described here work only by creating artificial illiquidity, and I don't know of any rigorous argument that creating more middlemen improves efficiency) A lot of HFT is market-makers competing for positions in the book. They're simply providing liquidity and literally the more trades they make the more money they make. Market-making is socially valuable (decreases the cost of trading aka the spread) in a similar way that arbitrage is, and as I understand it this is why people are so hesitant to regulate HFT, despite some of the problems it causes. As far as preferential treatment, consider that exchange fee schedules prefer these kinds of traders for a reason. Exchanges are for-profit and their liquidity providers don't execute trades for the fun of it, there has to be incentive, even if the incentives are at times perverse

ubernostrum 13y ago
If someone was already willing to sell 50 shares of Acme Corp. at $20.00, having an HFT bot get advance knowledge of an order, buy those shares and then re-offer them at $20.01 is not market-making and is not providing liquidity -- it is injecting an artificial middleman, with the cost of a middleman, for no other reason than "we can make money off injecting a middleman".
- wcummings 13y ago
  My point is that regulating this kind of trading can also damage socially useful trading activity and that's why it's unlikely to happen. There's a lot of rabble rousing about HFT in these discussions on HN (in a similar thread someone went as far as to say arbitrage was not socially useful), I thought it was worth pointing out its more complicated than "HFT IS A BIG SCAM" I'll admit its funny to see the libertarian bastion of HN get so worked up about HFT. Free markets are all fun and games when it's Uber or AirBnB, but HFT harming retail investors seems to really hit a nerve
  - fleitz 13y ago
    That's the funny thing too, retail investors are fucked beyond believe and it has nothing to do with HFT and everything to do with not having satellite pictures of walmart parking lots, etc. They trade at such an unbelievable disadvantage that it's laughable that HFT could make any difference. (Plus retailers dont move big enough blocks to get into HFT issues)
- yummyfajitas 13y ago
  How does an HFT bot get advance knowledge of an order?
  - ubernostrum 13y ago
    The scenario most commonly presented is something like: 1. Buyer A wants to buy 50 shares of Acme Corp. 2. The order hits Exchange A first, and Exchange A has 25 shares of Acme Corp. at $20.00 (currently the best price). 3. The order is partially filled, and then on to Exchange 2 to try to get the other 25 shares. 4. Exchange 2 also has 25 shares of Acme Corp. at $20.00 at the time the order hits Exchange 1. 5. An HFT bot saw the order hit Exchange 1, and, in the time it takes for the order to move on to Exchange 2, is able (due to having much faster access) to buy those 25 shares at Exchange 2 before the order gets there, then offer them to the buyer at $20.01. The fact that the HFT bot was able to act in Exchange 2 with advance knowledge of an order that would arrive at but had not yet arrived at Exchange 2 is what people complain about. And, more generally, people complain that this provides no benefit to buyers or sellers; the buyer was going to buy those 25 shares, and the seller was going to sell those 25 shares, no matter what. So no additional liquidity or market-making went on, and the buyer's order likely is not filled any more quickly than it would otherwise have been. (and several articles complain that this practice actually leads to loss of liquidity, in that orders go unfilled because HFT bots racing ahead from exchange to exchange have reduced the previously-available shares) The workaround that's been presented is to have the actual initial order take circuitous, deliberately time-delaying routes to the exchanges in order to have it hit multiple exchanges within a short enough time that an HFT bot can't inject itself as an artifical middleman.
    - yummyfajitas 13y ago
      What you describe is called predatory trading. It will almost never occur with a half-lot order, but can occur with large orders. Rather than repeat myself, I'll just link to a blog post I just wrote about it. http://www.chrisstucchio.com/blog/2014/fervent_defense_of_frontrunning_hfts.html http://www.chrisstucchio.com/blog/2014/fervent_defense_of_fr...

ubernostrum 13y ago

If someone was already willing to sell 50 shares of Acme Corp. at $20.00, having an HFT bot get advance knowledge of an order, buy those shares and then re-offer them at $20.01 is not market-making and is not providing liquidity -- it is injecting an artificial middleman, with the cost of a middleman, for no other reason than "we can make money off injecting a middleman".

wcummings 13y ago
My point is that regulating this kind of trading can also damage socially useful trading activity and that's why it's unlikely to happen. There's a lot of rabble rousing about HFT in these discussions on HN (in a similar thread someone went as far as to say arbitrage was not socially useful), I thought it was worth pointing out its more complicated than "HFT IS A BIG SCAM" I'll admit its funny to see the libertarian bastion of HN get so worked up about HFT. Free markets are all fun and games when it's Uber or AirBnB, but HFT harming retail investors seems to really hit a nerve
- fleitz 13y ago
  That's the funny thing too, retail investors are fucked beyond believe and it has nothing to do with HFT and everything to do with not having satellite pictures of walmart parking lots, etc. They trade at such an unbelievable disadvantage that it's laughable that HFT could make any difference. (Plus retailers dont move big enough blocks to get into HFT issues)
yummyfajitas 13y ago
How does an HFT bot get advance knowledge of an order?
- ubernostrum 13y ago
  The scenario most commonly presented is something like: 1. Buyer A wants to buy 50 shares of Acme Corp. 2. The order hits Exchange A first, and Exchange A has 25 shares of Acme Corp. at $20.00 (currently the best price). 3. The order is partially filled, and then on to Exchange 2 to try to get the other 25 shares. 4. Exchange 2 also has 25 shares of Acme Corp. at $20.00 at the time the order hits Exchange 1. 5. An HFT bot saw the order hit Exchange 1, and, in the time it takes for the order to move on to Exchange 2, is able (due to having much faster access) to buy those 25 shares at Exchange 2 before the order gets there, then offer them to the buyer at $20.01. The fact that the HFT bot was able to act in Exchange 2 with advance knowledge of an order that would arrive at but had not yet arrived at Exchange 2 is what people complain about. And, more generally, people complain that this provides no benefit to buyers or sellers; the buyer was going to buy those 25 shares, and the seller was going to sell those 25 shares, no matter what. So no additional liquidity or market-making went on, and the buyer's order likely is not filled any more quickly than it would otherwise have been. (and several articles complain that this practice actually leads to loss of liquidity, in that orders go unfilled because HFT bots racing ahead from exchange to exchange have reduced the previously-available shares) The workaround that's been presented is to have the actual initial order take circuitous, deliberately time-delaying routes to the exchanges in order to have it hit multiple exchanges within a short enough time that an HFT bot can't inject itself as an artifical middleman.
  - yummyfajitas 13y ago
    What you describe is called predatory trading. It will almost never occur with a half-lot order, but can occur with large orders. Rather than repeat myself, I'll just link to a blog post I just wrote about it. http://www.chrisstucchio.com/blog/2014/fervent_defense_of_frontrunning_hfts.html http://www.chrisstucchio.com/blog/2014/fervent_defense_of_fr...