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>I don't understand why HFT is still around, if it's considered a problem. Primarily because regulatory capture has, until now, overruled all attempts to reign

>I don't understand why HFT is still around, if it's considered a problem. Primarily because regulatory capture has, until now, overruled all attempts to reign it in. The banks and hedge funds engaged in this activity wield vast amounts of political power. >Naively, couldn't all the craziness about HFT be resolved by enforcing a 1-second tick on the markets? Not really. That just changes the game from "who can trade a picosecond before you?" to "who can trade a picosecond before the tick?". An almost microscopic tax on transactions would prevent it, though while having a minimal impact on all other trading activity.

joosters 12y ago
Not really. That just changes the game from "who can trade a picosecond before you?" to "who can trade a picosecond before the tick?" The lack of live market book data means that you won't need the ultra fast connections, so at least one part of the networking arms race becomes de-weaponised. You still have the problem of it being advantageous to bid at the end of the auction, but this could be solved by pricing. Just like the exchanges give incentives to offer prices rather than to take them, they could make bidding at the start of an auction cheaper than at the end of it.
yummyfajitas 12y ago
This is silly. HFT is a $10-50B/year industry, depending on who's numbers you go with. (You can ballpark the numbers by multiplying trade volume by the spread.) For comparison, Morgan Stanley alone made $8B in profit in the last quarter [1]. HFT is tiny, a drop in the bucket compared to the rest of the financial industry. Further, many big players in the industry are against HFT since HFT reduces their information advantage over smaller players [2]. The danger in a 1-second tick is that a) a massive change like this is hard to do [3] and b) it would likely increase volatility. A stylized fact of dynamical systems is that continuous feedback reduces volatility, whereas discrete step sizes increase it - witness how many numerical ODE solvers can blow up even while the underlying ODE is stable. [1] https://www.google.com/finance?q=NYSE%3AMS&fstype=ii&ei=bVYIVNiUNcqfrAHHp4GoCA https://www.google.com/finance?q=NYSE%3AMS&fstype=ii&ei=bVYI... [2] http://www.chrisstucchio.com/blog/2014/fervent_defense_of_frontrunning_hfts.html http://www.chrisstucchio.com/blog/2014/fervent_defense_of_fr... [3] Bloomberg, Excel and other calculators contain mathematical errors (e.g., "weekends are sometimes treated as a business day for the purpose of interest accrual") which cannot be fixed because the change would be too disruptive.
- zweiterlinde 12y ago
  FWIW, the estimates I hear kicked around from Tabb Group and the like are more in the $1-5B range, not $10-50B. Which is to say, even a tinier drop in the bucket.
  - kasey_junk 12y ago
    That's the "profit" number which is useful and much lower than people expect, but not what people normally use when describing the size of an industry.
- crdoconnor 12y ago
  >This is silly. HFT is a $10-50B/year industry, depending on who's numbers you go with. For comparison, Morgan Stanley alone made $8B in profit in the last quarter [1]. I'm not sure what your point is here? There's more to finance than HFT? There are other, bigger rip offs out there?
  - kasey_junk 12y ago
    His point is that small industries (especially ones with very low margins like HFT) cannot wield the political muscle required to invoke "regulatory capture". For instance BlackRock, a large hedge fund that has been very vocal in it's anti HFT stance made more profits in 1 quarter last year than the entire HFT industry. If regulatory capture was going to happen, don't you think they would be in a better position to accomplish this? Bill Ackman is another giant player who is highly vocal against HFT and is known to spend donation money to attempt to make trades go his way. HFT is the little guy in this story, the little guy doesn't get to create regulatory environments.
    - crdoconnor 12y ago
      The few larger players who came out against it have done so only relatively recently, and in Goldman's case, only subsequent to being under investigation by the AG for its own HFT practices.
rayiner 12y ago
> Primarily because regulatory capture has, until now, overruled all attempts to reign it in. The banks and hedge funds engaged in this activity wield vast amounts of political power. Your invocation of the "regulatory capture" trope doesn't even make sense in this context. The big banks and hedge funds aren't the major HFT players, and many of them are opposed to HFT.
- crdoconnor 12y ago
  >many of them are opposed to HFT. Remind me which of those banks are calling for it to be strictly regulated or prohibited? I've heard that some banks are now selling "protection" against HFT sharks in the form of dark pools (which is often not really protection at all - see Barclays). Bearing that in mind I can't imagine that it would hurt for them to put out a marketing message that is disdainful of the practice while still quietly engaging in it.
  - rayiner 12y ago
    Goldman Sachs: http://www.washingtonpost.com/news/volokh-conspiracy/wp/2014/04/06/should-high-frequency-trading-be-regulated http://www.washingtonpost.com/news/volokh-conspiracy/wp/2014...
    - crdoconnor 12y ago
      They're under investigation for fraud relating to HFT: http://dealbook.nytimes.com/2014/05/09/goldman-under-investigation-for-high-speed-trading/ http://dealbook.nytimes.com/2014/05/09/goldman-under-investi... I imagine that WSJ op ed is probably damage control.
      - rayiner 12y ago
        I don't see your point. It's entirely consistent to say that restrictions on HFT would be in Goldman's interests, but until those are in place, they make some money engaging in HFT. In other words, the advantages to Goldman of restricting HFT (which hurts its major business line of trading on information advantages) would be worth more than losing whatever little HFT revenue they make (they're not a major player).

joosters 12y ago

Not really. That just changes the game from "who can trade a picosecond before you?" to "who can trade a picosecond before the tick?" The lack of live market book data means that you won't need the ultra fast connections, so at least one part of the networking arms race becomes de-weaponised. You still have the problem of it being advantageous to bid at the end of the auction, but this could be solved by pricing. Just like the exchanges give incentives to offer prices rather than to take them, they could make bidding at the start of an auction cheaper than at the end of it.

yummyfajitas 12y ago

This is silly. HFT is a $10-50B/year industry, depending on who's numbers you go with. (You can ballpark the numbers by multiplying trade volume by the spread.) For comparison, Morgan Stanley alone made $8B in profit in the last quarter [1]. HFT is tiny, a drop in the bucket compared to the rest of the financial industry. Further, many big players in the industry are against HFT since HFT reduces their information advantage over smaller players [2]. The danger in a 1-second tick is that a) a massive change like this is hard to do [3] and b) it would likely increase volatility. A stylized fact of dynamical systems is that continuous feedback reduces volatility, whereas discrete step sizes increase it - witness how many numerical ODE solvers can blow up even while the underlying ODE is stable. [1] https://www.google.com/finance?q=NYSE%3AMS&fstype=ii&ei=bVYIVNiUNcqfrAHHp4GoCA https://www.google.com/finance?q=NYSE%3AMS&fstype=ii&ei=bVYI... [2] http://www.chrisstucchio.com/blog/2014/fervent_defense_of_frontrunning_hfts.html http://www.chrisstucchio.com/blog/2014/fervent_defense_of_fr... [3] Bloomberg, Excel and other calculators contain mathematical errors (e.g., "weekends are sometimes treated as a business day for the purpose of interest accrual") which cannot be fixed because the change would be too disruptive.

zweiterlinde 12y ago
FWIW, the estimates I hear kicked around from Tabb Group and the like are more in the $1-5B range, not $10-50B. Which is to say, even a tinier drop in the bucket.
- kasey_junk 12y ago
  That's the "profit" number which is useful and much lower than people expect, but not what people normally use when describing the size of an industry.
crdoconnor 12y ago
>This is silly. HFT is a $10-50B/year industry, depending on who's numbers you go with. For comparison, Morgan Stanley alone made $8B in profit in the last quarter [1]. I'm not sure what your point is here? There's more to finance than HFT? There are other, bigger rip offs out there?
- kasey_junk 12y ago
  His point is that small industries (especially ones with very low margins like HFT) cannot wield the political muscle required to invoke "regulatory capture". For instance BlackRock, a large hedge fund that has been very vocal in it's anti HFT stance made more profits in 1 quarter last year than the entire HFT industry. If regulatory capture was going to happen, don't you think they would be in a better position to accomplish this? Bill Ackman is another giant player who is highly vocal against HFT and is known to spend donation money to attempt to make trades go his way. HFT is the little guy in this story, the little guy doesn't get to create regulatory environments.
  - crdoconnor 12y ago
    The few larger players who came out against it have done so only relatively recently, and in Goldman's case, only subsequent to being under investigation by the AG for its own HFT practices.

rayiner 12y ago

> Primarily because regulatory capture has, until now, overruled all attempts to reign it in. The banks and hedge funds engaged in this activity wield vast amounts of political power. Your invocation of the "regulatory capture" trope doesn't even make sense in this context. The big banks and hedge funds aren't the major HFT players, and many of them are opposed to HFT.

crdoconnor 12y ago
>many of them are opposed to HFT. Remind me which of those banks are calling for it to be strictly regulated or prohibited? I've heard that some banks are now selling "protection" against HFT sharks in the form of dark pools (which is often not really protection at all - see Barclays). Bearing that in mind I can't imagine that it would hurt for them to put out a marketing message that is disdainful of the practice while still quietly engaging in it.
- rayiner 12y ago
  Goldman Sachs: http://www.washingtonpost.com/news/volokh-conspiracy/wp/2014/04/06/should-high-frequency-trading-be-regulated http://www.washingtonpost.com/news/volokh-conspiracy/wp/2014...
  - crdoconnor 12y ago
    They're under investigation for fraud relating to HFT: http://dealbook.nytimes.com/2014/05/09/goldman-under-investigation-for-high-speed-trading/ http://dealbook.nytimes.com/2014/05/09/goldman-under-investi... I imagine that WSJ op ed is probably damage control.
    - rayiner 12y ago
      I don't see your point. It's entirely consistent to say that restrictions on HFT would be in Goldman's interests, but until those are in place, they make some money engaging in HFT. In other words, the advantages to Goldman of restricting HFT (which hurts its major business line of trading on information advantages) would be worth more than losing whatever little HFT revenue they make (they're not a major player).