6 ms·

Just because the game was rigged already doesn't mean that rigging it even more doesn't make a difference.

by glesica 13y ago

yxhuvud 13y ago
But then you have to make an actual argument stating why HFT would make it more rigged than the alternative would be. The collapse of spreads is a lot more important than speed, for small investors.
- williamcotton 13y ago
  I asked a similar question below... Can you explain how the smaller spread is better for the entire system? I'm not convinced that anyone really gains much from these very marginal gains in liquidity other than the HFT entities. Personally, I'm fine paying 2% more for something if it means that the person I'm buying it from is keeping the money as opposed to some middle-man taking a cut. There seems to be a lot of unquestioned dogma in the financial world about the efficiency of the marketplace on a macroeconomic scale. But again, please correct me! I'm honestly trying to learn more about this.
  - consz 13y ago
    Why do you think there wouldn't still be market makers if the spread widens by 2%?
    - williamcotton 13y ago
      Well, what's the difference to me if the spread is 0.1% or 2%? Am I really not going to buy? If I want to buy a security, don't I have to buy it at whatever price is being offered? Sure, some dude can cover the spread on both sides, but if the guys selling it to me just passed it through 50 hands going from the firm that issued the security to get to me, what's the point of all that? Like, I get the point of the liquidity offered by market makers, but I'm just questioning the marginal utility. How much less likely am I to buy or sell a security based on the marginal decreases in the spread? It doesn't seem like it would be linear. And what effects are caused by having so much complexity between the issuer and the investor?
      - tptacek 13y ago
        The difference is whether you pay middlemen 0.1% of the value of your trade of 2% of your trade. If you can't get worked up over a 100+bp difference in cost of trading, you shouldn't be worked up over HFT, which is operating at much smaller price deltas.
        williamcotton 13y ago
        Is a marketplace designed for retail investors that disallows HFT something that would be better or worse for retail investors? Let's pretend that the marketplace only sells securities with dividends. The people buying them are not interested in their liquidity, only in their ability to store value as well as ofter a steady return. Why would I want to buy shares in companies in any other type of marketplace? Can you explain how this hypothetical market would function differently than how our current markets function?
        tptacek 13y ago
        Worse. You don't have to guess: there are two compelling pieces of evidence you can use to evaluate. First, you can look at spreads since electronic traders wiped out the 1/8ths market makers in the 1990s. Second, you can look at the Canadian experiment that increased cost of trades and drove spreads up. "Type of company" and "marketplace" are orthogonal concerns.
        williamcotton 13y ago
        Let's say I'm not interested in spreads or liquidity beyond being able to within a day or two purchase or sell a share that pays dividends on company earnings. What would make me want to go with a market that offered lower spreads and more liquidity? How would it affect a long term holder? Isn't there a cost to all of these transactions occurring? Like, why do I need the spread to be as small as possible? How much is actually saved? How much are the infrastructure costs for maintaing a marketplace that supports these high frequency trades? Isn't there room for a much simpler, low frequency marketplace that had fractions of the operational costs? Couldn't savings be passed on to retail investors with a cheaper marketplace?
  - yxhuvud 13y ago
    But the person you would buy from is just as much a middle-man as the HFT! Market makers have always existed, and the only difference is that the new middlemen are taking a lot smaller share than they did before. You are no longer paying for fatcat brokers, and HFT bots are a lot less likely to give inside information to friends.
    - williamcotton 13y ago
      But what about the spread between the actual issuer of the security and the actual investor looking for a long term value store? How does that change? Isn't this minute spread just a result of speculators trading amongst themselves? Pardon me for not making it clear, but I assume that at least one simple market maker is required for the transaction. I'm talking about it passing through more hands than theirs. How does it magically reduce what the fundraiser is willing to sell at and what I'm willing to buy at?
      - yxhuvud 13y ago
        Huh? The fundraiser would get money at the price at the lower end of the spread, and the investor would buy at the upper end, so your question is nonsensical. The difference is what the market maker takes for providing liquidity (in exchange for providing money now and for taking a risk that the price may change out of the spread range). Spread == price of liquidity.
        williamcotton 13y ago
        What I'm asking is, how does HFT lower the spread? The spread is just the difference between what one person is willing to sell and another willing to buy. If it's Monday and I'm trying to raise money for a venture by selling shares at a certain price, and some other dude has extra money laying around but wants to buy it for less, that's the spread, right? I either sell for less directly to the retail investor or a market maker happens to come in to the picture and I happily get to sell to him at the price I wanted to. He thinks my price will go up by Friday and that these other dudes will definitely be willing to pay more for the shares that he did by then. At which point he will profit, right? But that never changed what I was willing to sell and some dude was unwilling to buy at on a Monday. How does HFT affect all of this?
tptacek 13y ago
No, but when the new "rigging" actually improves the situation for retail investors at the expense of increased costs for hedge funds, it becomes hard to make simplistic comparisons. The public markets are a series of zero-sum games. When you fully understand this, it becomes apparent that almost any profit-making strategy for engaging with them can be described as a form of "rigging". Every dollar Virtu makes has to come out of someone else's pockets. The important thing to know is "whose pocket". People on HN love to play six-degrees-of-Mom's-retirement about this issue. That game doesn't actually work. Consider two scenarios: (a) By increasing the cost for billion-dollar broker/dealers to shop blocks, electronic trading systems are making it more expensive for mutual funds to trade and thus extracting rents from the hides of pension funds; the pockets picked are ultimately those of ordinary Americans. (b) By preying on naive market-making strategies, electronic trading systems are disrupting an entrenched cartel of billion-dollar market players, and in the process driving trading spreads to historic lows without measurably impacting volatility in the market; the pockets picked are those of other, more brazen pickpockets. The difference between (a) and (b) is crucially important. If the status quo ante is bad, and the new situation is better, then organizing against that change is a positive action taken in favor of unfairness. Significant evidence points to (b).
- tom_b 13y ago
  Since I noticed previously you were also reading Dark Pools (commented in another thread), I found that book to pile up evidence for (b) as well. Do you have similar takeaway from Dark Pools? In particular, in the early days of electronic trading, that book clearly makes the case that the hackers (or maybe mainly Josh Levine) were completely focused on disrupting a corrupt and "good old boy" network driven trading system. But (and I say this after having read both the Lewis book and Dark Pools), I'm not entirely sure what to think about HFT (or more broadly, electronic trading in general) and market volatility. It kind of seems like there is going to be some popularly accepted government regulation of electronic trading that my gut tells me will be more acceptable for the "other, more brazen pickpockets" than the new, despite the fact that we think choice (b) is better for investors.
  - tptacek 13y ago

Just because the game was rigged already doesn't mean that rigging it even more doesn't make a difference.

by glesica 13y ago

Just because the game was rigged already doesn't mean that rigging it even more doesn't make a difference.

But then you have to make an actual argument stating why HFT would make it more rigged than the alternative would be. The collapse of spreads is a lot more important than speed, for small investors.

williamcotton 13y ago
I asked a similar question below... Can you explain how the smaller spread is better for the entire system? I'm not convinced that anyone really gains much from these very marginal gains in liquidity other than the HFT entities. Personally, I'm fine paying 2% more for something if it means that the person I'm buying it from is keeping the money as opposed to some middle-man taking a cut. There seems to be a lot of unquestioned dogma in the financial world about the efficiency of the marketplace on a macroeconomic scale. But again, please correct me! I'm honestly trying to learn more about this.
- consz 13y ago
  Why do you think there wouldn't still be market makers if the spread widens by 2%?
  - williamcotton 13y ago
    Well, what's the difference to me if the spread is 0.1% or 2%? Am I really not going to buy? If I want to buy a security, don't I have to buy it at whatever price is being offered? Sure, some dude can cover the spread on both sides, but if the guys selling it to me just passed it through 50 hands going from the firm that issued the security to get to me, what's the point of all that? Like, I get the point of the liquidity offered by market makers, but I'm just questioning the marginal utility. How much less likely am I to buy or sell a security based on the marginal decreases in the spread? It doesn't seem like it would be linear. And what effects are caused by having so much complexity between the issuer and the investor?
    - tptacek 13y ago
      The difference is whether you pay middlemen 0.1% of the value of your trade of 2% of your trade. If you can't get worked up over a 100+bp difference in cost of trading, you shouldn't be worked up over HFT, which is operating at much smaller price deltas.
      - williamcotton 13y ago
        Is a marketplace designed for retail investors that disallows HFT something that would be better or worse for retail investors? Let's pretend that the marketplace only sells securities with dividends. The people buying them are not interested in their liquidity, only in their ability to store value as well as ofter a steady return. Why would I want to buy shares in companies in any other type of marketplace? Can you explain how this hypothetical market would function differently than how our current markets function?
        tptacek 13y ago
        Worse. You don't have to guess: there are two compelling pieces of evidence you can use to evaluate. First, you can look at spreads since electronic traders wiped out the 1/8ths market makers in the 1990s. Second, you can look at the Canadian experiment that increased cost of trades and drove spreads up. "Type of company" and "marketplace" are orthogonal concerns.
        williamcotton 13y ago
        Let's say I'm not interested in spreads or liquidity beyond being able to within a day or two purchase or sell a share that pays dividends on company earnings. What would make me want to go with a market that offered lower spreads and more liquidity? How would it affect a long term holder? Isn't there a cost to all of these transactions occurring? Like, why do I need the spread to be as small as possible? How much is actually saved? How much are the infrastructure costs for maintaing a marketplace that supports these high frequency trades? Isn't there room for a much simpler, low frequency marketplace that had fractions of the operational costs? Couldn't savings be passed on to retail investors with a cheaper marketplace?
- yxhuvud 13y ago
  But the person you would buy from is just as much a middle-man as the HFT! Market makers have always existed, and the only difference is that the new middlemen are taking a lot smaller share than they did before. You are no longer paying for fatcat brokers, and HFT bots are a lot less likely to give inside information to friends.
  - williamcotton 13y ago
    But what about the spread between the actual issuer of the security and the actual investor looking for a long term value store? How does that change? Isn't this minute spread just a result of speculators trading amongst themselves? Pardon me for not making it clear, but I assume that at least one simple market maker is required for the transaction. I'm talking about it passing through more hands than theirs. How does it magically reduce what the fundraiser is willing to sell at and what I'm willing to buy at?
    - yxhuvud 13y ago
      Huh? The fundraiser would get money at the price at the lower end of the spread, and the investor would buy at the upper end, so your question is nonsensical. The difference is what the market maker takes for providing liquidity (in exchange for providing money now and for taking a risk that the price may change out of the spread range). Spread == price of liquidity.
      - williamcotton 13y ago
        What I'm asking is, how does HFT lower the spread? The spread is just the difference between what one person is willing to sell and another willing to buy. If it's Monday and I'm trying to raise money for a venture by selling shares at a certain price, and some other dude has extra money laying around but wants to buy it for less, that's the spread, right? I either sell for less directly to the retail investor or a market maker happens to come in to the picture and I happily get to sell to him at the price I wanted to. He thinks my price will go up by Friday and that these other dudes will definitely be willing to pay more for the shares that he did by then. At which point he will profit, right? But that never changed what I was willing to sell and some dude was unwilling to buy at on a Monday. How does HFT affect all of this?

tptacek 13y ago

No, but when the new "rigging" actually improves the situation for retail investors at the expense of increased costs for hedge funds, it becomes hard to make simplistic comparisons. The public markets are a series of zero-sum games. When you fully understand this, it becomes apparent that almost any profit-making strategy for engaging with them can be described as a form of "rigging". Every dollar Virtu makes has to come out of someone else's pockets. The important thing to know is "whose pocket". People on HN love to play six-degrees-of-Mom's-retirement about this issue. That game doesn't actually work. Consider two scenarios: (a) By increasing the cost for billion-dollar broker/dealers to shop blocks, electronic trading systems are making it more expensive for mutual funds to trade and thus extracting rents from the hides of pension funds; the pockets picked are ultimately those of ordinary Americans. (b) By preying on naive market-making strategies, electronic trading systems are disrupting an entrenched cartel of billion-dollar market players, and in the process driving trading spreads to historic lows without measurably impacting volatility in the market; the pockets picked are those of other, more brazen pickpockets. The difference between (a) and (b) is crucially important. If the status quo ante is bad, and the new situation is better, then organizing against that change is a positive action taken in favor of unfairness. Significant evidence points to (b).

tom_b 13y ago
Since I noticed previously you were also reading Dark Pools (commented in another thread), I found that book to pile up evidence for (b) as well. Do you have similar takeaway from Dark Pools? In particular, in the early days of electronic trading, that book clearly makes the case that the hackers (or maybe mainly Josh Levine) were completely focused on disrupting a corrupt and "good old boy" network driven trading system. But (and I say this after having read both the Lewis book and Dark Pools), I'm not entirely sure what to think about HFT (or more broadly, electronic trading in general) and market volatility. It kind of seems like there is going to be some popularly accepted government regulation of electronic trading that my gut tells me will be more acceptable for the "other, more brazen pickpockets" than the new, despite the fact that we think choice (b) is better for investors.
- tptacek 13y ago