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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 N

by 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
- kiyoto 12y ago
  That's arguable. I never had a chance to estimate this in earnest, but I have the hypothesis that the majority of HFT transactions are with one another. Sure, they collectively provide liquidity to non-HFT investors (because the order flow has to come from somewhere), but I also had the hypothesis that if the clearing houses (CME/NYSE/etc.) could improve their matching engines and/or consolidate disparate exchanges, that might solve the liquidity problem without HFTs.
  - wdewind 12y ago
    What about spread reduction? Also curious on your perspective of their role in market making. Do HFTs ever end up buying a larger block than they know is being demanded and end up holding some of the remaining for a time?
axanoeychron 12y ago
> I find the general "Main Street" sentiment toward the profession to be misguided. > 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. Your post is interesting and I learned from it. However you admit that HFT is not the most valuable thing smart people could be doing - this is the reason that many dislike it. HFT provides little value to humanity or society. I do not think this makes me 'misguided' or 'have no clue' and I don't like how this makes it okay for advocates to sweep away concerns about it. We could easily say the same thing: algorithmic trading in itself is misguided: it does not use technology to solve socially useful problems such as global distribution, food production or folding proteins to better understand drug interaction and find cures for disease.
- hkmurakami 12y ago
  I think we can say similar things about Google engineers working on making infinitesimally small ad targeting efficiency gains, yet this group typically has much less vitriol directed at them, though the degree to which this is the case may differ. The counter argument to this would be that said efforts help fund more genuinely beneficial work such as their recent work in robotics and proliferation of internet availability globally, but how the net balance of talent productivity plays out is murky. The ad team is a large, multifaceted team inside Google.
  - nerfhammer 12y ago
    Difference being engineers don't get paid as much – though perhaps they should be. Finance guys are much more aggressive about capturing more of the revenue they create in salary and bonuses, while engineers seem to shrug at being "overpaid" while letting proportionally more of their value go to execs, investors and giant cash hoards.
    - kasey_junk 12y ago
      I have not seen that to be the case. As a software developer in the HFT trade I make about the same as I would working for google. If the firms I work for take off or have particularly good years, I might make a lot more than the google salary bands, but it would be about the same as if I were an early employee (but not founder). Now if you are talking about ibank traders who HFT are replacing, that is true. Their salary bands are enormously higher than engineer pay scales. Sort of explains why they direct so much vitriol towards HFT.
rdrdss23 12y ago
If you step back for a second. You say: " HFT does NOT take anything from most investors most of the time." Yet the HFT people are making tons of money. Where is it ultimately coming from?
- tptacek 12y ago
  Easy: other middlemen in the markets; "the finance industry".
- kasey_junk 12y ago
  "tons of money" is also relative. HFT firms make way less money than the ibanks that act as middle men to most investors and the exchanges. Most of the money in HFT actually comes from those previously more rapacious middlemen's bonus.
- idohft 12y ago
  The industry doesn't really make that much money. Estimates for this past year were in the $1-2 billion range. That's not big for the finance sector, or any industry. That being said, it doesn't take that many people to run a shop, so individuals may be paid a lot.
- mmaldacker 12y ago
  They don't make tons of money. I think Michael Lewis quotes a annual revenue of 16 billions for all the HFT companies put together. That's less then half of goldman sachs' revenue alone.
ericd 12y ago
Many "Main Street" investors have their retirement savings locked up in large funds that trade much more frequently than the investor themselves do. Would you not say that HFT is skimming off of those trades, and ultimately skimming from the "Main Street" investor's retirement savings? Would you say that the marginal value that these firms add for those investors' funds is worth the premium?
- idohft 12y ago
  Vanguard, the world's biggest mutual fund, notes that their costs have gone down since HFT has come into play. http://www.cnbc.com/id/101615521 http://www.cnbc.com/id/101615521
  - deleted 12y ago
    [deleted]
  - ericd 12y ago
    Is it clear that the reduction in bid-ask spread is due to HFT rather than some other change in market dynamics? I frequently see "Bid-ask spread has reduced by x in the last two decades, therefore, HFT is good", but I've never seen a causal link explained, and a lot of other things have happened to the structure of the markets in that time.
    - kasey_junk 12y ago
      It's not exactly proven and would be very hard to prove. That said, nearly everyone thinks electronic markets are better than the alternative. Any electronic market will open itself to algorithmic trading, so what most people are actually worried about are unintended consequences of changes to the current system. That and for most people who actually understand the mechanics what is going on, the current system seems way better for the vast majority of people than the one it replaced, so we have little reason to change.
    - idohft 12y ago
      I think it's pretty clear that HFT has a big role in this. If you look at the order books of US equities, most of the most aggressive orders on the book are ones that look like they come from high frequency strategies. Furthermore, if you believe that around 50% of trading volume is from HFT, and most of them are market making, then yeah, it lends one to conclude that the high frequency players are the ones who place more aggressive orders (which means, ones which reduce the spread) which gets them executions.
foobarqux 12y ago
Why did you leave?

by kiyoto 12y ago

KaiserPro 12y ago

The biggest thing HFT provides: liquidity

chrisgd 12y ago
Until they don't, unlike specialists
kiyoto 12y ago
That's arguable. I never had a chance to estimate this in earnest, but I have the hypothesis that the majority of HFT transactions are with one another. Sure, they collectively provide liquidity to non-HFT investors (because the order flow has to come from somewhere), but I also had the hypothesis that if the clearing houses (CME/NYSE/etc.) could improve their matching engines and/or consolidate disparate exchanges, that might solve the liquidity problem without HFTs.
- wdewind 12y ago
  What about spread reduction? Also curious on your perspective of their role in market making. Do HFTs ever end up buying a larger block than they know is being demanded and end up holding some of the remaining for a time?

axanoeychron 12y ago

> I find the general "Main Street" sentiment toward the profession to be misguided. > 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. Your post is interesting and I learned from it. However you admit that HFT is not the most valuable thing smart people could be doing - this is the reason that many dislike it. HFT provides little value to humanity or society. I do not think this makes me 'misguided' or 'have no clue' and I don't like how this makes it okay for advocates to sweep away concerns about it. We could easily say the same thing: algorithmic trading in itself is misguided: it does not use technology to solve socially useful problems such as global distribution, food production or folding proteins to better understand drug interaction and find cures for disease.

hkmurakami 12y ago
I think we can say similar things about Google engineers working on making infinitesimally small ad targeting efficiency gains, yet this group typically has much less vitriol directed at them, though the degree to which this is the case may differ. The counter argument to this would be that said efforts help fund more genuinely beneficial work such as their recent work in robotics and proliferation of internet availability globally, but how the net balance of talent productivity plays out is murky. The ad team is a large, multifaceted team inside Google.
- nerfhammer 12y ago
  Difference being engineers don't get paid as much – though perhaps they should be. Finance guys are much more aggressive about capturing more of the revenue they create in salary and bonuses, while engineers seem to shrug at being "overpaid" while letting proportionally more of their value go to execs, investors and giant cash hoards.
  - kasey_junk 12y ago
    I have not seen that to be the case. As a software developer in the HFT trade I make about the same as I would working for google. If the firms I work for take off or have particularly good years, I might make a lot more than the google salary bands, but it would be about the same as if I were an early employee (but not founder). Now if you are talking about ibank traders who HFT are replacing, that is true. Their salary bands are enormously higher than engineer pay scales. Sort of explains why they direct so much vitriol towards HFT.

rdrdss23 12y ago

If you step back for a second. You say: " HFT does NOT take anything from most investors most of the time." Yet the HFT people are making tons of money. Where is it ultimately coming from?

tptacek 12y ago
Easy: other middlemen in the markets; "the finance industry".
kasey_junk 12y ago
"tons of money" is also relative. HFT firms make way less money than the ibanks that act as middle men to most investors and the exchanges. Most of the money in HFT actually comes from those previously more rapacious middlemen's bonus.
idohft 12y ago
The industry doesn't really make that much money. Estimates for this past year were in the $1-2 billion range. That's not big for the finance sector, or any industry. That being said, it doesn't take that many people to run a shop, so individuals may be paid a lot.
mmaldacker 12y ago
They don't make tons of money. I think Michael Lewis quotes a annual revenue of 16 billions for all the HFT companies put together. That's less then half of goldman sachs' revenue alone.

ericd 12y ago

Many "Main Street" investors have their retirement savings locked up in large funds that trade much more frequently than the investor themselves do. Would you not say that HFT is skimming off of those trades, and ultimately skimming from the "Main Street" investor's retirement savings? Would you say that the marginal value that these firms add for those investors' funds is worth the premium?

idohft 12y ago
Vanguard, the world's biggest mutual fund, notes that their costs have gone down since HFT has come into play. http://www.cnbc.com/id/101615521 http://www.cnbc.com/id/101615521
- deleted 12y ago
  [deleted]
- ericd 12y ago
  Is it clear that the reduction in bid-ask spread is due to HFT rather than some other change in market dynamics? I frequently see "Bid-ask spread has reduced by x in the last two decades, therefore, HFT is good", but I've never seen a causal link explained, and a lot of other things have happened to the structure of the markets in that time.
  - kasey_junk 12y ago
    It's not exactly proven and would be very hard to prove. That said, nearly everyone thinks electronic markets are better than the alternative. Any electronic market will open itself to algorithmic trading, so what most people are actually worried about are unintended consequences of changes to the current system. That and for most people who actually understand the mechanics what is going on, the current system seems way better for the vast majority of people than the one it replaced, so we have little reason to change.
  - idohft 12y ago
    I think it's pretty clear that HFT has a big role in this. If you look at the order books of US equities, most of the most aggressive orders on the book are ones that look like they come from high frequency strategies. Furthermore, if you believe that around 50% of trading volume is from HFT, and most of them are market making, then yeah, it lends one to conclude that the high frequency players are the ones who place more aggressive orders (which means, ones which reduce the spread) which gets them executions.

foobarqux 12y ago

Why did you leave?