7 ms·

Healthy markets are markets where everyone has access to the same information. If I want to sell 100,000 shares of Yelp (which is a multi-million dollar transa

by patio11 13y ago

Healthy markets are markets where everyone has access to the same information. If I want to sell 100,000 shares of Yelp (which is a multi-million dollar transaction), the fact that several million dollars of Yelp is about to hit the market is a really, really important bit of information. I have a reason to hide that from the rest of the market at least until I can complete my sale. HFTs profit by ascertaining my intentions faster than I can complete my intended action and then broadcasting my intentions to other market participants via the ticker tape, whereas previously my intentions were proprietary information locked in my head. An argument against HFT is, necessarily, an argument that I should be allowed to benefit from material non-public information about the near-term state of trading in Yelp.

wavesounds 13y ago
Your saying you should be able to front run the market because otherwise its unfair that I know what decision I'm going to make before you know what decision I'm going to make?
- stephencanon 13y ago
  No; he’s saying that you have to choose: if you really believe that the same information should be equally available to everyone, you need to admit HFT that reacts to that information as it becomes available. It’s perfectly reasonable to argue that shouldn’t be allowed, but then you are (implicitly) arguing that either (a) complete market information should not be publicly available or (b) there should be some mechanism which prevents some individuals from acting on that information as quickly as they would like to.
  - wavesounds 13y ago
    We're talking about different things, actually responding quickly to information is not the problem, gaining access to it before other people can is, which is what Michael Lewis's book was all about. Nobody is saying Algorithmic Trading is wrong, just front-running in HFT that's the problem.
    - tptacek 13y ago
      Look more carefully at Lewis' scenario: there are two kinds of entities that have access to secret information: informed institutional traders and HFTs. Lewis is effectively arguing that there should be only one.
klochner 13y ago
That's private information. It is an important distinction. You're saying the market should have a right to know whether I plan on selling my shares next year.
- harryh 13y ago
  It's private information right up until the millisecond that your trade hits the exchanges. Then it's public information.
  - hackinthebochs 13y ago
    Which the HFT firms have earlier access to and greater ability to respond to. Can this legitimately be called fair?
    - harryh 13y ago
      They get early access because they pay to be colocated on the exchange. Literally anyone can do this. Can you think of a more fair system than this?
      - hackinthebochs 13y ago
        A system where no one can do this or that eliminates the ability to profit off of such a position. Some have suggested a minimum limit on how long one can hold a stock. Seems reasonable to me.
        harryh 13y ago
        What do you think would happen to spreads if there was a non-trivial minimum limit on how long one could hold a stock?
        hackinthebochs 13y ago
        Obviously they would increase. There seems to be an assumption that reduced spreads at any scale benefits the economy as a whole. On the scale of cents, I don't see how this is necessarily so. On the other hand, I can imagine there being a trivial limit as far as the wider economy is concerned, but still eliminating the benefit that colocation gives HFT firms. Do you disagree?
pedrocr 13y ago
>If I want to sell 100,000 shares of Yelp (which is a multi-million dollar transaction), the fact that several million dollars of Yelp is about to hit the market is a really, really important bit of information. I have a reason to hide that from the rest of the market at least until I can complete my sale. HFTs profit by ascertaining my intentions faster than I can complete my intended action and then broadcasting my intentions to other market participants via the ticker tape, whereas previously my intentions were proprietary information locked in my head. Let me see if I understand your example. I want to dump 100k@100$ and yet the current book doesn't have that many buy orders (otherwise the order would just complete). The book has buy 1k@100 and sell 1k@105 So I try to be sneaky and just clean out the book with 1k@100, selling 100 shares each to 10 retail investors and wait for more 100$ retail investors to show up by placing another 1k@100 sell order. The HFT sees this quickly and puts in orders for buy at 90$ and sell at 95$. Now the next retail investor sees this and just buys at 95 instead of 100, saving 5. I need to then sell at 90 instead of 100, losing 10. The HFT firm makes 5. So the HFT firm is taking money from informed investors and taking some for itself and giving some to people who have no special information about the market like retail investors. If that is the case the only problem with HFTs are second order. That (much like bitcoin) they spend a bunch of resources with busywork that could be at least partially eliminated by more decimal points in pricing trades. And that they may discourage some informed investors from adding information to the market because they can't profit from it, reversing their benefit.

by patio11 13y ago

wavesounds 13y ago

Your saying you should be able to front run the market because otherwise its unfair that I know what decision I'm going to make before you know what decision I'm going to make?

stephencanon 13y ago
No; he’s saying that you have to choose: if you really believe that the same information should be equally available to everyone, you need to admit HFT that reacts to that information as it becomes available. It’s perfectly reasonable to argue that shouldn’t be allowed, but then you are (implicitly) arguing that either (a) complete market information should not be publicly available or (b) there should be some mechanism which prevents some individuals from acting on that information as quickly as they would like to.
- wavesounds 13y ago
  We're talking about different things, actually responding quickly to information is not the problem, gaining access to it before other people can is, which is what Michael Lewis's book was all about. Nobody is saying Algorithmic Trading is wrong, just front-running in HFT that's the problem.
  - tptacek 13y ago
    Look more carefully at Lewis' scenario: there are two kinds of entities that have access to secret information: informed institutional traders and HFTs. Lewis is effectively arguing that there should be only one.

klochner 13y ago

That's private information. It is an important distinction. You're saying the market should have a right to know whether I plan on selling my shares next year.

harryh 13y ago
It's private information right up until the millisecond that your trade hits the exchanges. Then it's public information.
- hackinthebochs 13y ago
  Which the HFT firms have earlier access to and greater ability to respond to. Can this legitimately be called fair?
  - harryh 13y ago
    They get early access because they pay to be colocated on the exchange. Literally anyone can do this. Can you think of a more fair system than this?
    - hackinthebochs 13y ago
      A system where no one can do this or that eliminates the ability to profit off of such a position. Some have suggested a minimum limit on how long one can hold a stock. Seems reasonable to me.
      - harryh 13y ago
        What do you think would happen to spreads if there was a non-trivial minimum limit on how long one could hold a stock?
        hackinthebochs 13y ago
        Obviously they would increase. There seems to be an assumption that reduced spreads at any scale benefits the economy as a whole. On the scale of cents, I don't see how this is necessarily so. On the other hand, I can imagine there being a trivial limit as far as the wider economy is concerned, but still eliminating the benefit that colocation gives HFT firms. Do you disagree?

pedrocr 13y ago

>If I want to sell 100,000 shares of Yelp (which is a multi-million dollar transaction), the fact that several million dollars of Yelp is about to hit the market is a really, really important bit of information. I have a reason to hide that from the rest of the market at least until I can complete my sale. HFTs profit by ascertaining my intentions faster than I can complete my intended action and then broadcasting my intentions to other market participants via the ticker tape, whereas previously my intentions were proprietary information locked in my head. Let me see if I understand your example. I want to dump 100k@100$ and yet the current book doesn't have that many buy orders (otherwise the order would just complete). The book has buy 1k@100 and sell 1k@105 So I try to be sneaky and just clean out the book with 1k@100, selling 100 shares each to 10 retail investors and wait for more 100$ retail investors to show up by placing another 1k@100 sell order. The HFT sees this quickly and puts in orders for buy at 90$ and sell at 95$. Now the next retail investor sees this and just buys at 95 instead of 100, saving 5. I need to then sell at 90 instead of 100, losing 10. The HFT firm makes 5. So the HFT firm is taking money from informed investors and taking some for itself and giving some to people who have no special information about the market like retail investors. If that is the case the only problem with HFTs are second order. That (much like bitcoin) they spend a bunch of resources with busywork that could be at least partially eliminated by more decimal points in pricing trades. And that they may discourage some informed investors from adding information to the market because they can't profit from it, reversing their benefit.