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This is all a matter of perspective. Some people think that markets exist and whatever happens, happens. It seems to me that a lot of the HFT folks fall into

This is all a matter of perspective. Some people think that markets exist and whatever happens, happens. It seems to me that a lot of the HFT folks fall into that category. Others say "the stock market is supposed to exist so that large companies can raise funds for growth" The market isn't a thing that exists unto itself, it's a thing that humans created for human purposes. If something is happening in that market, due to a particular set of incentives that causes human beings (which are the only reason said market exists) to feel that sub-optimal outcomes are happening, well then the rules can be changed. The market exists to serve humans and if humans aren't being served they can change it. So once you have a market structure that exists on smaller time scales than human beings are capable of comprehending everything about "what's really going on here" goes right out the window. To human beings water is essential for life and largely speaking pretty harmless. But to flies water is hugely dangerous. Surface tension is a joke to a human being but it is much stronger than most insects. That's why so many insects have proboscis. http://irl.cs.ucla.edu/papers/right-size.html http://irl.cs.ucla.edu/papers/right-size.html What we have here is one side trying to argue the technical side of things and being 100% correct. Technically their arguments are quite good. The other side is arguing philosophically and their arguments are good as well. The question then becomes, which is more important? Professionals involved in finance are split on the tradeoffs. It should not be surprising that those not professionally involved in finance don't care to learn why a non-intuitive outcome is better than an intuitive one.

harryh 13y ago
A lot of people apparently think that vaccines cause autism. But what if it was even more people? What if 100s of millions of people thought that? Would you make this argument: "People's trust in the health care industry is really important. If they don't trust it, then they won't go see doctors and take medicine when they should so more people will die and/or get sick. So we're just going to get rid of vaccines because of people's false belief. We know that vaccines are actually a good thing, but because people are confused and trust is important it's better overall to cave on this issue in order to increase the faith people have in the overall system." Because that's kind of the argument you are making here.
- msandford 13y ago
  No, no I'm not. The rules for markets are man-made. No markets would exist without humans. Humans created markets to serve themselves. As such the rules that govern how markets operate can be changed to serve humans. This is very easy to understand, wouldn't you agree? Now comes the question: does HFT serve humans? Some people say yes, others say no. Some argue that they add liquidity and thus earn their fees. Others say no, they don't add liquidity (since they tend not to trade during rough times). Still others say they add negative liquidity: when the markets are plenty liquid they rob market makers of deal flow (thus reducing market makers ability to earn a living) and then when things get tumultuous they shut down first taking the extra liquidity with them and also having the secondary effect of fewer market makers thus reducing liquidity further. Market makers are able to make money because of the uncorrelated order flow that they receive as market makers. But there are HFT firms which are inserting themselves between brokerages and market makers, and paying millions for the privilege. That means they take profits from the market maker and after receiving their cut, provide some of it to the brokerages originating the orders. Is that good or bad? I honestly don't know. I might lean towards it being bad since the HFT firms have no obligation to keep trading. But they might very well reduce spreads. And if they are reducing spreads there is value to that. http://www.businessinsider.com/brokerages-make-millions-selling-orders-to-high-frequency-trading-firms-2014-4 http://www.businessinsider.com/brokerages-make-millions-sell... So let's assume for a moment that they do reduce spreads (good) but they also reduce liquidity during crises (bad). That is the very definition of what is called an engineering tradeoff. What is your design criteria? What are your goals? Engineering tradeoffs are at the heart of why basically everything is the way it is. Why are some cars faster and why do others get better gas mileage? Why are some bridges built with steel and others with concrete and others with wood? Why do some phones have a lot of battery life and other phones have a lot of features? So I've heard plenty about how HFT firms reduce spreads, and many argue that it's a good thing. But they're not an unmitigated good! There are downsides to HFT as well. Which should win out? That's more a matter of opinion than fact.
  - harryh 13y ago
    > As such the rules that govern how markets operate can be changed to serve humans. This is very easy to understand, wouldn't you agree? I agree with this. > Now comes the question: does HFT serve humans? Some people say yes, others say no. I would say that the "others" in this statement are incorrect (except in some isolated and relatively unusual circumstances). Since upthread you said "Technically their arguments are quite good." I had assumed that you agreed with me here, but perhaps not? > but they also reduce liquidity during crises (bad). They don't "reduct liquidity during crises." They might provide less liquidity during a crisis than they do at other times, but that's not the same thing.

harryh 13y ago

A lot of people apparently think that vaccines cause autism. But what if it was even more people? What if 100s of millions of people thought that? Would you make this argument: "People's trust in the health care industry is really important. If they don't trust it, then they won't go see doctors and take medicine when they should so more people will die and/or get sick. So we're just going to get rid of vaccines because of people's false belief. We know that vaccines are actually a good thing, but because people are confused and trust is important it's better overall to cave on this issue in order to increase the faith people have in the overall system." Because that's kind of the argument you are making here.

msandford 13y ago
No, no I'm not. The rules for markets are man-made. No markets would exist without humans. Humans created markets to serve themselves. As such the rules that govern how markets operate can be changed to serve humans. This is very easy to understand, wouldn't you agree? Now comes the question: does HFT serve humans? Some people say yes, others say no. Some argue that they add liquidity and thus earn their fees. Others say no, they don't add liquidity (since they tend not to trade during rough times). Still others say they add negative liquidity: when the markets are plenty liquid they rob market makers of deal flow (thus reducing market makers ability to earn a living) and then when things get tumultuous they shut down first taking the extra liquidity with them and also having the secondary effect of fewer market makers thus reducing liquidity further. Market makers are able to make money because of the uncorrelated order flow that they receive as market makers. But there are HFT firms which are inserting themselves between brokerages and market makers, and paying millions for the privilege. That means they take profits from the market maker and after receiving their cut, provide some of it to the brokerages originating the orders. Is that good or bad? I honestly don't know. I might lean towards it being bad since the HFT firms have no obligation to keep trading. But they might very well reduce spreads. And if they are reducing spreads there is value to that. http://www.businessinsider.com/brokerages-make-millions-selling-orders-to-high-frequency-trading-firms-2014-4 http://www.businessinsider.com/brokerages-make-millions-sell... So let's assume for a moment that they do reduce spreads (good) but they also reduce liquidity during crises (bad). That is the very definition of what is called an engineering tradeoff. What is your design criteria? What are your goals? Engineering tradeoffs are at the heart of why basically everything is the way it is. Why are some cars faster and why do others get better gas mileage? Why are some bridges built with steel and others with concrete and others with wood? Why do some phones have a lot of battery life and other phones have a lot of features? So I've heard plenty about how HFT firms reduce spreads, and many argue that it's a good thing. But they're not an unmitigated good! There are downsides to HFT as well. Which should win out? That's more a matter of opinion than fact.
- harryh 13y ago
  > As such the rules that govern how markets operate can be changed to serve humans. This is very easy to understand, wouldn't you agree? I agree with this. > Now comes the question: does HFT serve humans? Some people say yes, others say no. I would say that the "others" in this statement are incorrect (except in some isolated and relatively unusual circumstances). Since upthread you said "Technically their arguments are quite good." I had assumed that you agreed with me here, but perhaps not? > but they also reduce liquidity during crises (bad). They don't "reduct liquidity during crises." They might provide less liquidity during a crisis than they do at other times, but that's not the same thing.