11 ms·

High Frequency Trading and Finance's Race to Irrelevance

101 points by hype7 12y ago

minikites 12y ago
> What Lewis’s book demonstrated to me isn’t just how “bad” HFTs are per se, but rather, what happens when finance keeps walking down the path it seems to be set on — a path that involves abstracting itself from the creation of real-world value. The final destination? It will enter a world entirely of its own — a world in which it is fighting to capture value that is completely independent of whether any is created in the first place. I'd say the financial markets have been there for 6-8 years already.
- cube13 12y ago
  They're been at that point for the last century, at least.
- Vektorweg 12y ago
  Isn't it the goal of an artist to create an imaginary world? ;)
- rsync 12y ago
  Nothing will change, since it's turtles all the way down. The first person to discount a bill at the very first bank was "abstracting itself from the creation of real-world value". Later, I'm sure someone said the exact same sentence that you just did when the first exchange traded fund (ETF) was created. I know for a fact it was said throughout the 90s in relation to derivatives, etc. In the future, HFT as it exists today will be a quaint feature of a bygone era that will be referenced to illustrate the problems with whatever new practice has superseded it. What does matter is where you are on the spectrum and how fragile that makes you, but there is no natural law limiting how abstracted you can be and how fragile you can be. By some relative measures we're impossibly abstracted and fragile, but by other relative measures (as yet unknown) we're adorably simple.
  - jeremyjh 12y ago
    I thought EFTs were only possible due to HFT, which seemed like one of the greatest benefits to retail investors. A little bit of arbitrage tax is no where near as bad as sales loads and management fees.
    - dragontamer 12y ago
      The only problem is that arbitrage tax is hard to measure, while sales loads and management fees are predictable values. But I agree with your point overall. Getting pennies skimmed off of my trades is not nearly as big a deal as a 0.1% yearly recurring fee on say... a $100,000 retirement account. (ie: $100 / year). Those tiny percentages add up to a huge amount of money in the long run. I've heard of reports of 1.5% or even higher management fees (or ~$1,500+ / year in this example)
lmg643 12y ago
I started reading the Cringley book on IBM. It's a captivating and maddening read. By this story IBM management, trying to satisfy the desires of shareholders looking for earnings growth, is destroying the company. HBS is graduating lots of portfolio managers and analysts who contribute to this phenomenon. Not so many HBS grads in HFT, based on the folks I know in the industry. HFTs certainly aren't driving major global corporations into the ground by pushing for stupid forms of management like share buybacks, "outsourcing" core competencies, and the like. I give this guy credit for referencing these impacts. I don't think HFT is really part of that trend at all. HFT is actually pretty benign when you dig into the details. Sure, they scalp pennies here and there, and it adds up. But the competitive pressures on technology force efficiencies to a point, which is good for the market.
- wehadfun 12y ago
  I agree . I am far from an expert but I did not understand the connection between HFT and companies making bad long term decisions for short term. He said himeself that HFT firms don't care about the actual companies anyway.
- fred_durst 12y ago
  The author seems to expect the reader to assume that HFT does not create value. There are a few points to back up the belief but he does appear to state it more as a reminder than an argument. He then goes on to pose what I see to be the point of the piece. A question about whether the short term thinking created by shareholder pressure may be creating the same situation. Maybe IBM will never go out of business even after creating little or no value. But instead it will find methods outside of creating value in order to create wealth. Much like high frequency trading.
herge 12y ago
> it allowed the high frequency traders to peek at the ballots others were sending in to the newspaper before they arrived, in turn giving them the ability to cast their votes using information not yet available to the rest of the market. From what I gathered from Lewis's book, the crux of the problem is that people were doing their trades in multiple exchanges and that HFTs were simply noting trades in the fastest exchanges to reach (like BATS) and using that information in exchanges that were farther away. To take his analogy, it would be like using the results published in another newspaper the day before to determine your ballot choice.
goodgoblin 12y ago
HFT provides liquidity, and extracts a price for providing that value. HFT seems like stealing only because they are using advanced technology methods to make money, whereas in the 1980s and before market makers routinely manipulated the spread and pocketed likely a similar percent of trading profits. At least the online brokerages and pioneers of HFT broke down the antiquated 1/8 stock price ticks and lowered the spread and per share transaction costs.
- 001sky 12y ago
  Ugh. The memes. HFT is not "liquidity". The purpose of the "speed" is to elicit information.
  - tptacek 12y ago
    This comment isn't even wrong.
    - 001sky 12y ago
      Thanks for the clarification. /S
  - chimeracoder 12y ago
    > The purpose of the "speed" is to elicit information. Not quite. HFT uses information that you probably don't have, and acts on that information using software and hardware that you probably don't have[0]. You can obtain that information and that software/hardware - it's just expensive (high barrier to entry)[1]. As explained above, HFT exists because portions of the market are not perfectly competitive in the economic sense[2], but that's always been the case (and arguably was more so before the advent of computerized HFT). [0] It's not so much that you don't have the information - it's that the latency is too high for most players. [1] At least some portion of these costs are very real - the cost of maintaining low-latency connections between exchanges, colocating hardware, etc. [2] https://en.wikipedia.org/wiki/Perfect_competition https://en.wikipedia.org/wiki/Perfect_competition
dsjoerg 12y ago
Summary: investors who focus too much on short-term results are bad for the long-term success of the companies they buy and sell. High-frequency traders are somewhat similar, in that they don't care enough about the long-term health of the companies they buy and sell. Therefore they are bad.
- bunderbunder 12y ago
  I'll agree with the first premise. But I don't think the 2nd bit follows. The reason speculation based on short-term results is problematic is that it creates perverse incentive structures that discourage a company's management from thinking too much about the long-term success of the company. But that's only possible because speculators are able to create market demands that punish and reward specific kinds of behavior. But HFT doesn't really create demand; it only responds to it. So the analogy fits in every spot except the only one that matters for the sake of the argument.
deleted 12y ago
[deleted]
7Figures2Commas 12y ago
> Now, there are some rockstar CEOs — who oftentimes happen to be founders, such as Bezos, Steve Jobs, Reid Hastings — who have the ability to resist the pressure that the markets put on them. Another possibility the author should consider: there are some CEOs who have the ability to convince human investors that their long-term visions are worthy and deserving of steadfast support. What the author fails to address is the fact that not every chief executive has a great long-term vision, and not every chief executive is capable of persuading investors that he or she is capable of realizing such a vision. The implied notion that investors are somehow obligated to give the companies they invest in an arbitrarily long period of time in which to execute regardless of evidence of tangible progress is foolish.
hooande 12y ago
So the problem with traditional buy and hold investing based on fundamentals is that it's very slow. I don't mean slow in terms of latency and distance to servers, I mean that financial returns accumulate slowly. Investing in the market as a whole will return roughly 10%-15% depending on the year. This beats what most individual day traders and money managers can do, but is nothing close to what a well positioned HFT trading firm can make. "Sophisticated" trading strategies exist because the finance industry has focused itself on one goal to the exclusion of all others: Make as much money as possible. It doesn't matter if it's a zero sum game or if the most fit companies are being selected based on research in a darwinian process. A rational actor is going to chose 30% over 10% every time. The bottom line is that predicting the success of a given company is hard. Predicting what the other actors in the market are going to do is also difficult, but is much easier by comparison. Asa participant in the market you want to be in Keynes' newspaper contest, not in the business of making broad predictions about the future. As a member of society we'd prefer that capital be allocated to the firms that will use it to our most benefit. I don't think anyone wants to use the law to change the current system so that it is more useful to society. A lot of people are also unhappy with a lot of finance being in its own bubble of "irrelevance". This is a decision that we're all going to have to make about how we want the financial markets to work. Things seem to be working out ok now, in a general sense, so change might be a long time coming.
- SkyMarshal 12y ago
  >This beats what most individual day traders and money managers can do, but is nothing close to what a well positioned HFT trading firm can make. I don't know if this is actually true if you average up all the successes and failures. Probably more like, for every successful [daytrader|money manager|HFT firm] there are 9 that lose money or go bankrupt and nobody ever hears about again or includes in average return calculations. It's just that the rewards to the few successes are so tantalizing, there's never any shortage of folks jumping into the game trying their hand at it.
- Havoc 12y ago
  >The bottom line is that predicting the success of a given company is hard. Predicting what the other actors in the market are going to do is also difficult, but is much easier by comparison. Not sure I'd agree. With companies you can at least throw some old school research and hard work at the problem. Difficult but at least nobody is out to eat your lunch there. Its just difficult as opposed to cut-throat. >rational actor Can you really count on that if 60% of the market is AI and a sizable chunk of the rest is trading on "superior"/inside info?
bobcostas55 12y ago
I am so tired of clueless pundits talking about HFT...
michaelochurch 12y ago
Three words on this "race to irrelevance": lead versus leave. Our society is in a state of secessionism. Much of the escalating economic inequality comes from that impulse. The rich of yesterday (1945-73) saw themselves as leaders of the society. The rich of the new Gilded Age (1974-2014+) have given up and just want to escape it. They want private schools, country clubs, and closed social networks. They don't want to lead the masses, they want to leave them. Silicon Valley has been making its secessionist impulse visible of late, but HFT and "high finance" show a different secessionist tendency: the desire to get outside of any given industry or company and "float among" them as a financier. The brightest young people are being told not to join the regular economy with the proles, but to become part of an elite system of hedge funds, private equity shops, and overcapitalized "startups" whose products are meaningless other than advertising expenses to get middle-management positions, 10 years earlier than otherwise, for the founders. The smartest people have given up, sadly, on leading. This makes "leave" the attractive option. If you become a management consultant or investment banker, you don't have to commit to one industry or business. You float around until you make friends who can place you at high levels. After spending 8 years in a number of places but much of it in "the real economy" I can't say that I blame the leavers. The leavers are now ahead of me, career wise, as venture capitalists and the like; and there isn't much out here in "the rest of the economy" to lead. Perhaps paradoxically, the world ends up being run by leavers, because average people don't want to be led by the highest level of talent; they want leaders they can relate to.
- maxxxxx 12y ago
  You are making some good points here.
- coolfuzion 12y ago
  In that context, what do you think about and where do you place the success of feminism?
gd1 12y ago
An article written by a journalist, about a book written by a journalist. And neither of them have a clue. Layers upon layers of idiocy.
jwilliams 12y ago
I see HFT as a form of arbitrage. If you have huge volumes you can make money on FX markets too - but basically you get price convergence. The big players make enough of it to make it worthwhile, but it's really on the fringes.
- nickff 12y ago
  I have never heard of any firm making consistent positive returns on foreign exchange markets, in fact, it is often cited as an example of an efficient market, because it is so unpredictable. Alan Greenspan's autobiography mentions a discussion he had while working at Goldman Sachs, where he asked them how GS was making a consistent profit on FX (because no one else seemed to be able to), and they responded that it was because they got a commission from making the trades on behalf of the customers, but GS never traded FX on its own accounts.
dodders 12y ago
Treating HFT as a proxy for 'Finance' is a flawed premise. Without 'Finance', you would not have: - Cheap mortgage rates - mainly due to securitization. - Cheap loan rates - yes, car leasers, I'm looking at you.... - Rational commodity markets. Think Starbucks, every car/computer made today. - You get the idea. Certainly, some aspects of modern markets appear to add little value, but the bulk of 'finance' benefits not only companies but everyday consumers immensely. -
- akgerber 12y ago
  The 30-year mortgage is mostly a product of government. And in supply-constrained markets (most of the American coasts), low mortgage rates have mostly resulted in sharply higher-priced houses/land, which isn't good for anyone wanting to actually own a house. And that's one of the more benign results of mortgage securitization.
- kasey_junk 12y ago
  Without market makers and other speculative market participants you would not have rational commodity markets or liquid price efficient equities. HFT versions of those market participants are dramatically more efficient and fair than the participants they are replacing. That efficiency is shared with every other participant. If you believe in public commodities and equities markets, it is extremely hard to argue against HFT and in favor of pit traders...
- maxxxxx 12y ago
  I agree about rational commodity markets. However, I am not sure everyday consumers are benefiting from cheap loans. I think cheap mortgages have driven up house prices, cheap student loans have driven up tuition.
Permit 12y ago
Time and time again this discussion is hampered by the term "high frequency trading" which is much too general. An instance of a HFT algorithm behaving poorly should not condemn the practice as a whole. Saying "HFT is bad, just look at electronic front-running" is like saying "Sorting algorithms are slow, just look at bubble sort".
hkmurakami 12y ago
I really can't take any lessons derived from Lewis's book on HFT to heart, because every HFT friend I talk to (even the ones who are quite objective about its role in the markets) insist that much of the book is simply wrong.
- apo 12y ago
  Which parts?
  - kasey_junk 12y ago
    The major problems with the book fall into 3 major categories: A) He implies (but never proves) that HFT market makers use low latency connections, to buy shares ahead of other market participants, to sell back to them risk free. This is not how HFT market making works. HFT market makers are pricing on all the exchanges at the same time. So what they are doing is not buying something and selling it back to you risk free, but changing the price of their own offering to reflect new demand. B) That any of this is secret or requires insider information. It is all available on public websites, including governmental agency ones (for instance all "exotic" order types go through a public approval process). Further, in the book the only proof of ill gotten proprietary information being used for profit was from the supposed "heroes" of the story. C) That HFT is a large force that abuses it's power to take advantage of buy side participants who have "Main streets" best interest at heart. In fact, HFT firms are the small guys bringing efficiency at the cost of the powerful entrenched buy side middle men.
washedup 12y ago
HFT is a very small subset of finance. I doubt it will drive the whole industry to irrelevance. It will only drive itself to irrelevance.
JohnTHaller 12y ago
We still need to stop calling it High Frequency Trading and refer to it by what it is: Digital Front Running.
- nickff 12y ago
  HFT is completely distinct from front-running.[1][2] Front-running means that you (as an investment bank or other trading company) buy and sell stocks according to the orders you have received, but not yet executed from your clients (usually large institutional investors). HFT just means that you are quickly executing trades based on some algorithm(s). [1] http://en.wikipedia.org/wiki/High-frequency_trading http://en.wikipedia.org/wiki/High-frequency_trading [2] http://en.wikipedia.org/wiki/Front_running http://en.wikipedia.org/wiki/Front_running
kiyoto 12y ago
I want to shed some light on this topic. As a former HFT quant, I find the general "Main Street" sentiment toward the profession to be misguided. 1. HFT does NOT take anything from most investors most of the time. Most investors trade on a much longer investment horizon than any HFT firm. If you are a normal investor, you can lump up most of HFTs into the same bucket as the exchange itself. Most of them engage in some combinations of (i) pure arbitrage (ii) very short-termed statistical arbitrage (iii) market-making based on (i) and (ii). None of this is really that relevant to most investors. The only time HFTs can screw over a lot of investors is when their software goes awry. But this is a risk that any computerized system has, high frequency or not. If there is a major bug in Chicago Mercantile Exchange's matching engines, that would be a total disaster. 2. HFT firms do have huge execution risks: if you are making a two-sided market, there is a chance you can get "swept", meaning when the value of the underlying moves faster than you can react, you get filled on one side of the order without a realistic chance of hedging for a profit. HFT firms do a ton of research into estimating their execution risks. (edit: This point is often glossed over, making HFTs look like this evil superpower group of nerds exploiting other investors. That's not the case) 3. Finally, most HFT traders don't go into the profession solely for the money, just like most people do not apply for YC solely for their passion. Most of my former coworkers weren't that greedy and led pretty modest lives despite making hundreds of thousands of dollars. For them, high frequency trading had a locally optimal balance of tackling intellectually challenging problems while getting paid handsomely. I won't say HFT is the most valuable thing that its practitioners can be doing. I think the (trading) world would operate just fine without all these micro-second level transactions. But they are NOT the next subprime mortgage, and I just hope folks stop commenting on stuff they have no clue about.
- KaiserPro 12y ago
  The biggest thing HFT provides: liquidity
  - chrisgd 12y ago
    Until they don't, unlike specialists
  - 12y ago
bayesianhorse 12y ago
There is a very deep misunderstanding of the purpose of stock trading. Somehow almost everybody assumes that the very purpose of stock investment is to time the market. But no, timing the market is only a mechanism of the market. Those who successfully time the market are more a part of the market mechanism rather than the customers/end users of the market. The only real purpose of financial markets is risk management. Any human society (and non-human societies also) has to risk some capital to gain more capital/value. The purpose of stocks and financial markets in general is to diversify the risk, while still funding oportunities and it's the only proven mechanism by which a large portion of the population can participate in this wealth creation. The value of risk management is hard to fathom. But if you are a programmer, you might want to try and simulate "gambler's ruin" and see what happens with high risk or low risk strategies. In this simple game, computing the right risk management is the difference between stagnation and exponential growth. In a complex economy, this seems also to be true.
IanDrake 12y ago
The first part about Keynes is depressing. It presupposes there is only one winner. This is what anti-capitalists want everyone to believe. One winner, everyone else is a loser.
SeanDav 12y ago
I used to work at Merrill Lynch, I saw what the focus on short term results did and the culture it created. It was almost always about the quarterly results. I once saw an entire team of bond traders fired because their quarterly results weren't up to scratch, only to literally be hired back within days at a much, much higher cost, because the market suddenly turned almost overnight and Merrill Lynch was caught without a bond team in that area and had to frantically scramble to get one at almost any price. That particular team had been highly profitable, but their last quarterly result were poor. It mattered not that overall they were still vastly ahead in terms of profit for the company. They had a bad quarter and the next was looking poor, so they had to go, in order for the managers to have something to say to their investors. If the share price dropped a few cents or if the results weren't up to or exceeding market expectations, they would fire a few thousand people. I kid you not, this is how investment bank culture works. You are only as good as your last quarter. Traders would take very risky positions with huge or unknown long term risks, in order to make short term gains - for which they are richly rewarded. No one cared that this wonderful basket of exotic options was actually full of potential toxic waste, as long as it was printing money right now. By the time it exploded, most of those traders and managers would have made their millions and be retired or working somewhere else. It was and probably still is this intense focus on the short term that caused ML to very nearly go under and why ML is now called Bank of America ML. I doubt they have learned and the next black swan event is going to take them out, or the one after that.
roschdal 12y ago
The Oslo Børs stock exchange in Norway has a fee that will affect unnecessarily high order activity in the stock market, to prevent high freqiency trading. Here's more info: http://www.ft.com/intl/cms/s/0/b1a73be4-a57b-11e1-a77b-00144feabdc0.html http://www.ft.com/intl/cms/s/0/b1a73be4-a57b-11e1-a77b-00144... http://www.oslobors.no/ob_eng/Oslo-Boers/About-us/Press-room/News-from-Oslo-Boers/Oslo-Boers-to-discourage-excessive-order-activity http://www.oslobors.no/ob_eng/Oslo-Boers/About-us/Press-room...

101 points by hype7 12y ago

> What Lewis’s book demonstrated to me isn’t just how “bad” HFTs are per se, but rather, what happens when finance keeps walking down the path it seems to be set on — a path that involves abstracting itself from the creation of real-world value. The final destination? It will enter a world entirely of its own — a world in which it is fighting to capture value that is completely independent of whether any is created in the first place. I'd say the financial markets have been there for 6-8 years already.

cube13 12y ago
They're been at that point for the last century, at least.
Vektorweg 12y ago
Isn't it the goal of an artist to create an imaginary world? ;)
rsync 12y ago
Nothing will change, since it's turtles all the way down. The first person to discount a bill at the very first bank was "abstracting itself from the creation of real-world value". Later, I'm sure someone said the exact same sentence that you just did when the first exchange traded fund (ETF) was created. I know for a fact it was said throughout the 90s in relation to derivatives, etc. In the future, HFT as it exists today will be a quaint feature of a bygone era that will be referenced to illustrate the problems with whatever new practice has superseded it. What does matter is where you are on the spectrum and how fragile that makes you, but there is no natural law limiting how abstracted you can be and how fragile you can be. By some relative measures we're impossibly abstracted and fragile, but by other relative measures (as yet unknown) we're adorably simple.
- jeremyjh 12y ago
  I thought EFTs were only possible due to HFT, which seemed like one of the greatest benefits to retail investors. A little bit of arbitrage tax is no where near as bad as sales loads and management fees.
  - dragontamer 12y ago
    The only problem is that arbitrage tax is hard to measure, while sales loads and management fees are predictable values. But I agree with your point overall. Getting pennies skimmed off of my trades is not nearly as big a deal as a 0.1% yearly recurring fee on say... a $100,000 retirement account. (ie: $100 / year). Those tiny percentages add up to a huge amount of money in the long run. I've heard of reports of 1.5% or even higher management fees (or ~$1,500+ / year in this example)

lmg643 12y ago

I started reading the Cringley book on IBM. It's a captivating and maddening read. By this story IBM management, trying to satisfy the desires of shareholders looking for earnings growth, is destroying the company. HBS is graduating lots of portfolio managers and analysts who contribute to this phenomenon. Not so many HBS grads in HFT, based on the folks I know in the industry. HFTs certainly aren't driving major global corporations into the ground by pushing for stupid forms of management like share buybacks, "outsourcing" core competencies, and the like. I give this guy credit for referencing these impacts. I don't think HFT is really part of that trend at all. HFT is actually pretty benign when you dig into the details. Sure, they scalp pennies here and there, and it adds up. But the competitive pressures on technology force efficiencies to a point, which is good for the market.

wehadfun 12y ago
I agree . I am far from an expert but I did not understand the connection between HFT and companies making bad long term decisions for short term. He said himeself that HFT firms don't care about the actual companies anyway.
fred_durst 12y ago
The author seems to expect the reader to assume that HFT does not create value. There are a few points to back up the belief but he does appear to state it more as a reminder than an argument. He then goes on to pose what I see to be the point of the piece. A question about whether the short term thinking created by shareholder pressure may be creating the same situation. Maybe IBM will never go out of business even after creating little or no value. But instead it will find methods outside of creating value in order to create wealth. Much like high frequency trading.

herge 12y ago

> it allowed the high frequency traders to peek at the ballots others were sending in to the newspaper before they arrived, in turn giving them the ability to cast their votes using information not yet available to the rest of the market. From what I gathered from Lewis's book, the crux of the problem is that people were doing their trades in multiple exchanges and that HFTs were simply noting trades in the fastest exchanges to reach (like BATS) and using that information in exchanges that were farther away. To take his analogy, it would be like using the results published in another newspaper the day before to determine your ballot choice.

goodgoblin 12y ago

HFT provides liquidity, and extracts a price for providing that value. HFT seems like stealing only because they are using advanced technology methods to make money, whereas in the 1980s and before market makers routinely manipulated the spread and pocketed likely a similar percent of trading profits. At least the online brokerages and pioneers of HFT broke down the antiquated 1/8 stock price ticks and lowered the spread and per share transaction costs.

001sky 12y ago
Ugh. The memes. HFT is not "liquidity". The purpose of the "speed" is to elicit information.
- tptacek 12y ago
  This comment isn't even wrong.
  - 001sky 12y ago
    Thanks for the clarification. /S
- chimeracoder 12y ago
  > The purpose of the "speed" is to elicit information. Not quite. HFT uses information that you probably don't have, and acts on that information using software and hardware that you probably don't have[0]. You can obtain that information and that software/hardware - it's just expensive (high barrier to entry)[1]. As explained above, HFT exists because portions of the market are not perfectly competitive in the economic sense[2], but that's always been the case (and arguably was more so before the advent of computerized HFT). [0] It's not so much that you don't have the information - it's that the latency is too high for most players. [1] At least some portion of these costs are very real - the cost of maintaining low-latency connections between exchanges, colocating hardware, etc. [2] https://en.wikipedia.org/wiki/Perfect_competition https://en.wikipedia.org/wiki/Perfect_competition

dsjoerg 12y ago

Summary: investors who focus too much on short-term results are bad for the long-term success of the companies they buy and sell. High-frequency traders are somewhat similar, in that they don't care enough about the long-term health of the companies they buy and sell. Therefore they are bad.

bunderbunder 12y ago
I'll agree with the first premise. But I don't think the 2nd bit follows. The reason speculation based on short-term results is problematic is that it creates perverse incentive structures that discourage a company's management from thinking too much about the long-term success of the company. But that's only possible because speculators are able to create market demands that punish and reward specific kinds of behavior. But HFT doesn't really create demand; it only responds to it. So the analogy fits in every spot except the only one that matters for the sake of the argument.

deleted 12y ago

[deleted]

7Figures2Commas 12y ago

> Now, there are some rockstar CEOs — who oftentimes happen to be founders, such as Bezos, Steve Jobs, Reid Hastings — who have the ability to resist the pressure that the markets put on them. Another possibility the author should consider: there are some CEOs who have the ability to convince human investors that their long-term visions are worthy and deserving of steadfast support. What the author fails to address is the fact that not every chief executive has a great long-term vision, and not every chief executive is capable of persuading investors that he or she is capable of realizing such a vision. The implied notion that investors are somehow obligated to give the companies they invest in an arbitrarily long period of time in which to execute regardless of evidence of tangible progress is foolish.

hooande 12y ago

So the problem with traditional buy and hold investing based on fundamentals is that it's very slow. I don't mean slow in terms of latency and distance to servers, I mean that financial returns accumulate slowly. Investing in the market as a whole will return roughly 10%-15% depending on the year. This beats what most individual day traders and money managers can do, but is nothing close to what a well positioned HFT trading firm can make. "Sophisticated" trading strategies exist because the finance industry has focused itself on one goal to the exclusion of all others: Make as much money as possible. It doesn't matter if it's a zero sum game or if the most fit companies are being selected based on research in a darwinian process. A rational actor is going to chose 30% over 10% every time. The bottom line is that predicting the success of a given company is hard. Predicting what the other actors in the market are going to do is also difficult, but is much easier by comparison. Asa participant in the market you want to be in Keynes' newspaper contest, not in the business of making broad predictions about the future. As a member of society we'd prefer that capital be allocated to the firms that will use it to our most benefit. I don't think anyone wants to use the law to change the current system so that it is more useful to society. A lot of people are also unhappy with a lot of finance being in its own bubble of "irrelevance". This is a decision that we're all going to have to make about how we want the financial markets to work. Things seem to be working out ok now, in a general sense, so change might be a long time coming.

SkyMarshal 12y ago
>This beats what most individual day traders and money managers can do, but is nothing close to what a well positioned HFT trading firm can make. I don't know if this is actually true if you average up all the successes and failures. Probably more like, for every successful [daytrader|money manager|HFT firm] there are 9 that lose money or go bankrupt and nobody ever hears about again or includes in average return calculations. It's just that the rewards to the few successes are so tantalizing, there's never any shortage of folks jumping into the game trying their hand at it.
Havoc 12y ago
>The bottom line is that predicting the success of a given company is hard. Predicting what the other actors in the market are going to do is also difficult, but is much easier by comparison. Not sure I'd agree. With companies you can at least throw some old school research and hard work at the problem. Difficult but at least nobody is out to eat your lunch there. Its just difficult as opposed to cut-throat. >rational actor Can you really count on that if 60% of the market is AI and a sizable chunk of the rest is trading on "superior"/inside info?

bobcostas55 12y ago

I am so tired of clueless pundits talking about HFT...

michaelochurch 12y ago

Three words on this "race to irrelevance": lead versus leave. Our society is in a state of secessionism. Much of the escalating economic inequality comes from that impulse. The rich of yesterday (1945-73) saw themselves as leaders of the society. The rich of the new Gilded Age (1974-2014+) have given up and just want to escape it. They want private schools, country clubs, and closed social networks. They don't want to lead the masses, they want to leave them. Silicon Valley has been making its secessionist impulse visible of late, but HFT and "high finance" show a different secessionist tendency: the desire to get outside of any given industry or company and "float among" them as a financier. The brightest young people are being told not to join the regular economy with the proles, but to become part of an elite system of hedge funds, private equity shops, and overcapitalized "startups" whose products are meaningless other than advertising expenses to get middle-management positions, 10 years earlier than otherwise, for the founders. The smartest people have given up, sadly, on leading. This makes "leave" the attractive option. If you become a management consultant or investment banker, you don't have to commit to one industry or business. You float around until you make friends who can place you at high levels. After spending 8 years in a number of places but much of it in "the real economy" I can't say that I blame the leavers. The leavers are now ahead of me, career wise, as venture capitalists and the like; and there isn't much out here in "the rest of the economy" to lead. Perhaps paradoxically, the world ends up being run by leavers, because average people don't want to be led by the highest level of talent; they want leaders they can relate to.

maxxxxx 12y ago
You are making some good points here.
coolfuzion 12y ago
In that context, what do you think about and where do you place the success of feminism?

gd1 12y ago

An article written by a journalist, about a book written by a journalist. And neither of them have a clue. Layers upon layers of idiocy.

jwilliams 12y ago

I see HFT as a form of arbitrage. If you have huge volumes you can make money on FX markets too - but basically you get price convergence. The big players make enough of it to make it worthwhile, but it's really on the fringes.

nickff 12y ago
I have never heard of any firm making consistent positive returns on foreign exchange markets, in fact, it is often cited as an example of an efficient market, because it is so unpredictable. Alan Greenspan's autobiography mentions a discussion he had while working at Goldman Sachs, where he asked them how GS was making a consistent profit on FX (because no one else seemed to be able to), and they responded that it was because they got a commission from making the trades on behalf of the customers, but GS never traded FX on its own accounts.

dodders 12y ago

Treating HFT as a proxy for 'Finance' is a flawed premise. Without 'Finance', you would not have: - Cheap mortgage rates - mainly due to securitization. - Cheap loan rates - yes, car leasers, I'm looking at you.... - Rational commodity markets. Think Starbucks, every car/computer made today. - You get the idea. Certainly, some aspects of modern markets appear to add little value, but the bulk of 'finance' benefits not only companies but everyday consumers immensely. -

akgerber 12y ago
The 30-year mortgage is mostly a product of government. And in supply-constrained markets (most of the American coasts), low mortgage rates have mostly resulted in sharply higher-priced houses/land, which isn't good for anyone wanting to actually own a house. And that's one of the more benign results of mortgage securitization.
kasey_junk 12y ago
Without market makers and other speculative market participants you would not have rational commodity markets or liquid price efficient equities. HFT versions of those market participants are dramatically more efficient and fair than the participants they are replacing. That efficiency is shared with every other participant. If you believe in public commodities and equities markets, it is extremely hard to argue against HFT and in favor of pit traders...
maxxxxx 12y ago
I agree about rational commodity markets. However, I am not sure everyday consumers are benefiting from cheap loans. I think cheap mortgages have driven up house prices, cheap student loans have driven up tuition.

Permit 12y ago

Time and time again this discussion is hampered by the term "high frequency trading" which is much too general. An instance of a HFT algorithm behaving poorly should not condemn the practice as a whole. Saying "HFT is bad, just look at electronic front-running" is like saying "Sorting algorithms are slow, just look at bubble sort".

hkmurakami 12y ago

I really can't take any lessons derived from Lewis's book on HFT to heart, because every HFT friend I talk to (even the ones who are quite objective about its role in the markets) insist that much of the book is simply wrong.

apo 12y ago
Which parts?
- kasey_junk 12y ago
  The major problems with the book fall into 3 major categories: A) He implies (but never proves) that HFT market makers use low latency connections, to buy shares ahead of other market participants, to sell back to them risk free. This is not how HFT market making works. HFT market makers are pricing on all the exchanges at the same time. So what they are doing is not buying something and selling it back to you risk free, but changing the price of their own offering to reflect new demand. B) That any of this is secret or requires insider information. It is all available on public websites, including governmental agency ones (for instance all "exotic" order types go through a public approval process). Further, in the book the only proof of ill gotten proprietary information being used for profit was from the supposed "heroes" of the story. C) That HFT is a large force that abuses it's power to take advantage of buy side participants who have "Main streets" best interest at heart. In fact, HFT firms are the small guys bringing efficiency at the cost of the powerful entrenched buy side middle men.

washedup 12y ago

HFT is a very small subset of finance. I doubt it will drive the whole industry to irrelevance. It will only drive itself to irrelevance.

JohnTHaller 12y ago

We still need to stop calling it High Frequency Trading and refer to it by what it is: Digital Front Running.

nickff 12y ago
HFT is completely distinct from front-running.[1][2] Front-running means that you (as an investment bank or other trading company) buy and sell stocks according to the orders you have received, but not yet executed from your clients (usually large institutional investors). HFT just means that you are quickly executing trades based on some algorithm(s). [1] http://en.wikipedia.org/wiki/High-frequency_trading http://en.wikipedia.org/wiki/High-frequency_trading [2] http://en.wikipedia.org/wiki/Front_running http://en.wikipedia.org/wiki/Front_running

kiyoto 12y ago

I want to shed some light on this topic. As a former HFT quant, I find the general "Main Street" sentiment toward the profession to be misguided. 1. HFT does NOT take anything from most investors most of the time. Most investors trade on a much longer investment horizon than any HFT firm. If you are a normal investor, you can lump up most of HFTs into the same bucket as the exchange itself. Most of them engage in some combinations of (i) pure arbitrage (ii) very short-termed statistical arbitrage (iii) market-making based on (i) and (ii). None of this is really that relevant to most investors. The only time HFTs can screw over a lot of investors is when their software goes awry. But this is a risk that any computerized system has, high frequency or not. If there is a major bug in Chicago Mercantile Exchange's matching engines, that would be a total disaster. 2. HFT firms do have huge execution risks: if you are making a two-sided market, there is a chance you can get "swept", meaning when the value of the underlying moves faster than you can react, you get filled on one side of the order without a realistic chance of hedging for a profit. HFT firms do a ton of research into estimating their execution risks. (edit: This point is often glossed over, making HFTs look like this evil superpower group of nerds exploiting other investors. That's not the case) 3. Finally, most HFT traders don't go into the profession solely for the money, just like most people do not apply for YC solely for their passion. Most of my former coworkers weren't that greedy and led pretty modest lives despite making hundreds of thousands of dollars. For them, high frequency trading had a locally optimal balance of tackling intellectually challenging problems while getting paid handsomely. I won't say HFT is the most valuable thing that its practitioners can be doing. I think the (trading) world would operate just fine without all these micro-second level transactions. But they are NOT the next subprime mortgage, and I just hope folks stop commenting on stuff they have no clue about.

KaiserPro 12y ago
The biggest thing HFT provides: liquidity
- chrisgd 12y ago
  Until they don't, unlike specialists
- 12y ago

bayesianhorse 12y ago

There is a very deep misunderstanding of the purpose of stock trading. Somehow almost everybody assumes that the very purpose of stock investment is to time the market. But no, timing the market is only a mechanism of the market. Those who successfully time the market are more a part of the market mechanism rather than the customers/end users of the market. The only real purpose of financial markets is risk management. Any human society (and non-human societies also) has to risk some capital to gain more capital/value. The purpose of stocks and financial markets in general is to diversify the risk, while still funding oportunities and it's the only proven mechanism by which a large portion of the population can participate in this wealth creation. The value of risk management is hard to fathom. But if you are a programmer, you might want to try and simulate "gambler's ruin" and see what happens with high risk or low risk strategies. In this simple game, computing the right risk management is the difference between stagnation and exponential growth. In a complex economy, this seems also to be true.

IanDrake 12y ago

The first part about Keynes is depressing. It presupposes there is only one winner. This is what anti-capitalists want everyone to believe. One winner, everyone else is a loser.

SeanDav 12y ago

I used to work at Merrill Lynch, I saw what the focus on short term results did and the culture it created. It was almost always about the quarterly results. I once saw an entire team of bond traders fired because their quarterly results weren't up to scratch, only to literally be hired back within days at a much, much higher cost, because the market suddenly turned almost overnight and Merrill Lynch was caught without a bond team in that area and had to frantically scramble to get one at almost any price. That particular team had been highly profitable, but their last quarterly result were poor. It mattered not that overall they were still vastly ahead in terms of profit for the company. They had a bad quarter and the next was looking poor, so they had to go, in order for the managers to have something to say to their investors. If the share price dropped a few cents or if the results weren't up to or exceeding market expectations, they would fire a few thousand people. I kid you not, this is how investment bank culture works. You are only as good as your last quarter. Traders would take very risky positions with huge or unknown long term risks, in order to make short term gains - for which they are richly rewarded. No one cared that this wonderful basket of exotic options was actually full of potential toxic waste, as long as it was printing money right now. By the time it exploded, most of those traders and managers would have made their millions and be retired or working somewhere else. It was and probably still is this intense focus on the short term that caused ML to very nearly go under and why ML is now called Bank of America ML. I doubt they have learned and the next black swan event is going to take them out, or the one after that.

roschdal 12y ago

The Oslo Børs stock exchange in Norway has a fee that will affect unnecessarily high order activity in the stock market, to prevent high freqiency trading. Here's more info: http://www.ft.com/intl/cms/s/0/b1a73be4-a57b-11e1-a77b-00144feabdc0.html http://www.ft.com/intl/cms/s/0/b1a73be4-a57b-11e1-a77b-00144... http://www.oslobors.no/ob_eng/Oslo-Boers/About-us/Press-room/News-from-Oslo-Boers/Oslo-Boers-to-discourage-excessive-order-activity http://www.oslobors.no/ob_eng/Oslo-Boers/About-us/Press-room...