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The thing I consistently don't see addressed whenever HFTs are advanced as market makers is the fact that HFTs seem not to actually fulfill one important respon

The thing I consistently don't see addressed whenever HFTs are advanced as market makers is the fact that HFTs seem not to actually fulfill one important responsibility -- market makers typically operate under an obligation to provide liquidity, but HFTs seem to have a history of bailing out at times when liquidity is actually needed.

tptacek 13y ago
I'm not sure I understand what this means. If the HFTs "took their balls and went home", there would be that much less liquidity available as a certainty. The fact that some electronic orders get cancelled doesn't subtract from the orders that don't get cancelled. In other words: the average spread is the average spread regardless of how many "probing" orders are cancelled, and lower spreads are better. From what I can tell, these issues come into play primarily in two scenarios: (a) market orders with traders demanding immediate liquidity at the expense of optimal pricing, and (b) complicated hedged trades in which traders are depending on the synchronization of two different sets of correlated limit orders.
- ubernostrum 13y ago
  Well, as I understand it sort of the whole point of a market maker is that you don't "take your ball and go home". Traditional market makers are obligated not to do that. If HFTs want to be hailed as more efficient market makers, they should operate under the same obligation.
  - tptacek 13y ago
    Market markets (human, mechanical, hydraulic, electronic) are obligated to trade, but they are not obligated to trade at any particular price. They survive by constantly repricing their best bid/ask. They do that by... wait for it... canceling resting limit orders, and replacing them with orders at different prices.
wglb 13y ago
The story of the flash crash recovery has players of both varieties. When the dive happened, on trading firm, let's call it 'B' backed out of the market. Another trading firm, let's call it 'G' stayed in. 'G' had to stay in because they were contractually obligated to stay in the market by their market maker agreement with NYSE. So for some HFT, yes, they can and do bail, but others don't.
- consz 13y ago
  Another interesting anecdote -- most HFT groups shut off during the flash crash because they were running strategies that were fit on normal market conditions and really had no idea how their algorithm would perform in flash crash conditions. But not all HFTs turned off, and I know of at last two groups that kept running throughout the whole thing (trading equities, futures, currencies) and they made a phenomenal amount of money. Many traders I've talked to severely regretted turning off their strategies, and I've heard the argument that if such an event happens again, we're likely to see a lot more groups continue to run everything instead of completely turning off.
  - wglb 13y ago
    they made a phenomenal amount of money That is exactly what I heard as well.

tptacek 13y ago

I'm not sure I understand what this means. If the HFTs "took their balls and went home", there would be that much less liquidity available as a certainty. The fact that some electronic orders get cancelled doesn't subtract from the orders that don't get cancelled. In other words: the average spread is the average spread regardless of how many "probing" orders are cancelled, and lower spreads are better. From what I can tell, these issues come into play primarily in two scenarios: (a) market orders with traders demanding immediate liquidity at the expense of optimal pricing, and (b) complicated hedged trades in which traders are depending on the synchronization of two different sets of correlated limit orders.

ubernostrum 13y ago
Well, as I understand it sort of the whole point of a market maker is that you don't "take your ball and go home". Traditional market makers are obligated not to do that. If HFTs want to be hailed as more efficient market makers, they should operate under the same obligation.
- tptacek 13y ago
  Market markets (human, mechanical, hydraulic, electronic) are obligated to trade, but they are not obligated to trade at any particular price. They survive by constantly repricing their best bid/ask. They do that by... wait for it... canceling resting limit orders, and replacing them with orders at different prices.

wglb 13y ago

The story of the flash crash recovery has players of both varieties. When the dive happened, on trading firm, let's call it 'B' backed out of the market. Another trading firm, let's call it 'G' stayed in. 'G' had to stay in because they were contractually obligated to stay in the market by their market maker agreement with NYSE. So for some HFT, yes, they can and do bail, but others don't.

consz 13y ago
Another interesting anecdote -- most HFT groups shut off during the flash crash because they were running strategies that were fit on normal market conditions and really had no idea how their algorithm would perform in flash crash conditions. But not all HFTs turned off, and I know of at last two groups that kept running throughout the whole thing (trading equities, futures, currencies) and they made a phenomenal amount of money. Many traders I've talked to severely regretted turning off their strategies, and I've heard the argument that if such an event happens again, we're likely to see a lot more groups continue to run everything instead of completely turning off.
- wglb 13y ago
  they made a phenomenal amount of money That is exactly what I heard as well.