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You might like to read Matt Levine's article on Barclays. Choice quote: Barclays, like other dark pool operators, knew this: that you can run a pristine dark p

You might like to read Matt Levine's article on Barclays. Choice quote: Barclays, like other dark pool operators, knew this: that you can run a pristine dark pool without "predatory" high frequency traders, and without much trading, or you can run a useful dark pool with high-frequency traders. http://www.bloombergview.com/articles/2014-06-26/barclays-not-smart http://www.bloombergview.com/articles/2014-06-26/barclays-no... tl;dr; No HFT, no liquidity, and people who want to trade take their business elsewhere. [edit: If Barclays didn't need to bring HFTs in to provide liquidity, why did they subsidize HFTs? Matt Levine crunches the numbers - the biggest HFTs paid Barclays about $3M assuming a wild overestimate of the amount of liquidity they take, compared to institutional investors paying $4B.]

crdoconnor 12y ago
You do not need to sell privileged access to HFTs to your dark pool of institutional investors in order to have liquidity. Barclays were ripping off their clients. It wasn't even a complicated scam.
- kasey_junk 12y ago
  "You do not need to sell privileged access to HFTs to your dark pool of institutional investors in order to have liquidity." Except that is untrue historically. The reason dark pools sell that privileged access is that they can't provide liquidity any other way and their clients find it better to trade in HFT allowed environments than in ones without liquidity. IEX is trying something new, driving liquidity via scare tactics and publicity but we still don't know how that will work out. "Barclays were ripping off their clients. It wasn't even a complicated scam." Barclay's lied about allowing HFT firms into their dark pool. That is fraud but it has nothing to do with bad behavior on the part of the HFT. If you are suggesting that dark pools have inherent conflicts of interest that might be a more valid argument than "HFT IS THE EVILS"
  - crdoconnor 12y ago
    >Except that is untrue historically. Historically there was no HFT. Historically we have managed to have liquidity without it. Historically, the thing that brought us the greatest liquidity (something that is useful but vastly overrated) in the equities markets is electronic trading. >The reason dark pools sell that privileged access is that they can't provide liquidity I think it's cute the way that you're pretending that they were doing their investors a favor. They were selling dark pools to investors because investors WANTED to get away from HFT. If they wanted HFT infested waters they could have traded on the public markets! What the fuck do you think they were DOING there in the first place? They happily sacrificed a sliver of extra (and largely unnecessary) liquidity for the chance to not get ripped off.
    - harryh 12y ago
      Historically (in the 1980s) liquidity was 10x-20x more expensive than it is today. No one is willing to pay those sorts of prices anymore.
      - crdoconnor 12y ago
        Nobody is suggesting turning off electronic trading systems and going back to pen, paper and shouting in a pit.
        harryh 12y ago
        So computers are fine. Faster is fine. Just not too fast? Because once we pass some sort of arbitrary speed barrier then....what happens exactly?
        crdoconnor 12y ago
        The market stops rewarding those who do the best research and make the best value judgments about stocks and simply rewards those with the fastest exchange connections and best hardware (who can parasite upon the research and risklessly make money by covertly front running it). If value investors stop being rewarded for doing good research and correctly assessing the true value of a stock they will usually withdraw from the market (c.f. market for lemons: akerlof). It should be pretty obvious why a stock market whose values are disconnected from reality is a bad thing, and why having a pool of investors who do good real world research and get rewarded for it is a good thing.
conistonwater 12y ago
Exchanges subsidise market-making, because that is the unquestionably beneficial activity. But the high-frequency aspect of it is separate from the algorithmic-trading aspect of it, so one can criticise high-frequency trading for its uselessness, while accepting that algorithmic trading is hugely beneficial.
- kasey_junk 12y ago
  You are acting like algorithmic/hft/market making terms are clearly defined. It turns out that the vast majority of HFT are algorithmic market makers. Why is that? Because if they can trade more they are more profitable (if they are good at market making). This means that they can make less on each trade driving down the bid/ask spread which is good for everyone. Further, if they can reduce their risk by trading fast, then they don't have to price that risk into the spread once again making the price better for everyone. You can't separate hft from algorithmic market making because it is a central driving premise of the industry.
  - conistonwater 12y ago
    I think you can separate them perfectly well. Algorithmic traders compete on price: they aim to offer better prices, and narrower spreads, to liquidity consumers. High-frequency traders compete on the speed, with which orders are placed. The parasitic traders are the ones who profit not by providing you with a service, but by taking advantage of your inability to place and remove orders as quickly as they can. You can do both of these at the same time, but the two competitive advantages are different and separate. Market making is what all this activity is supposed to do, because it is a service provided by the liquidity providers, through the exchanges, to the liquidity consumers. I think the distinctions are clear enough.
    - yummyfajitas 12y ago
      Market makers compete with each other on speed. If market maker A and B both want to provide you liquidity at $10.00/10.05, whichever one is fastest will be the one to get your business. If market maker A wants to compete on price and provide liquidity at $10.003/10.049, too bad. That's illegal. He must compete on speed instead. I wrote some tutorials on mechanics of this a while back, you might find them useful: http://www.chrisstucchio.com/blog/2012/hft_apology.html http://www.chrisstucchio.com/blog/2012/hft_apology.html http://www.chrisstucchio.com/blog/2012/hft_apology2.html http://www.chrisstucchio.com/blog/2012/hft_apology2.html http://www.chrisstucchio.com/blog/2012/hft_whats_broken.html http://www.chrisstucchio.com/blog/2012/hft_whats_broken.html

crdoconnor 12y ago

You do not need to sell privileged access to HFTs to your dark pool of institutional investors in order to have liquidity. Barclays were ripping off their clients. It wasn't even a complicated scam.

kasey_junk 12y ago
"You do not need to sell privileged access to HFTs to your dark pool of institutional investors in order to have liquidity." Except that is untrue historically. The reason dark pools sell that privileged access is that they can't provide liquidity any other way and their clients find it better to trade in HFT allowed environments than in ones without liquidity. IEX is trying something new, driving liquidity via scare tactics and publicity but we still don't know how that will work out. "Barclays were ripping off their clients. It wasn't even a complicated scam." Barclay's lied about allowing HFT firms into their dark pool. That is fraud but it has nothing to do with bad behavior on the part of the HFT. If you are suggesting that dark pools have inherent conflicts of interest that might be a more valid argument than "HFT IS THE EVILS"
- crdoconnor 12y ago
  >Except that is untrue historically. Historically there was no HFT. Historically we have managed to have liquidity without it. Historically, the thing that brought us the greatest liquidity (something that is useful but vastly overrated) in the equities markets is electronic trading. >The reason dark pools sell that privileged access is that they can't provide liquidity I think it's cute the way that you're pretending that they were doing their investors a favor. They were selling dark pools to investors because investors WANTED to get away from HFT. If they wanted HFT infested waters they could have traded on the public markets! What the fuck do you think they were DOING there in the first place? They happily sacrificed a sliver of extra (and largely unnecessary) liquidity for the chance to not get ripped off.
  - harryh 12y ago
    Historically (in the 1980s) liquidity was 10x-20x more expensive than it is today. No one is willing to pay those sorts of prices anymore.
    - crdoconnor 12y ago
      Nobody is suggesting turning off electronic trading systems and going back to pen, paper and shouting in a pit.
      - harryh 12y ago
        So computers are fine. Faster is fine. Just not too fast? Because once we pass some sort of arbitrary speed barrier then....what happens exactly?
        crdoconnor 12y ago
        The market stops rewarding those who do the best research and make the best value judgments about stocks and simply rewards those with the fastest exchange connections and best hardware (who can parasite upon the research and risklessly make money by covertly front running it). If value investors stop being rewarded for doing good research and correctly assessing the true value of a stock they will usually withdraw from the market (c.f. market for lemons: akerlof). It should be pretty obvious why a stock market whose values are disconnected from reality is a bad thing, and why having a pool of investors who do good real world research and get rewarded for it is a good thing.

conistonwater 12y ago

Exchanges subsidise market-making, because that is the unquestionably beneficial activity. But the high-frequency aspect of it is separate from the algorithmic-trading aspect of it, so one can criticise high-frequency trading for its uselessness, while accepting that algorithmic trading is hugely beneficial.

kasey_junk 12y ago
You are acting like algorithmic/hft/market making terms are clearly defined. It turns out that the vast majority of HFT are algorithmic market makers. Why is that? Because if they can trade more they are more profitable (if they are good at market making). This means that they can make less on each trade driving down the bid/ask spread which is good for everyone. Further, if they can reduce their risk by trading fast, then they don't have to price that risk into the spread once again making the price better for everyone. You can't separate hft from algorithmic market making because it is a central driving premise of the industry.
- conistonwater 12y ago
  I think you can separate them perfectly well. Algorithmic traders compete on price: they aim to offer better prices, and narrower spreads, to liquidity consumers. High-frequency traders compete on the speed, with which orders are placed. The parasitic traders are the ones who profit not by providing you with a service, but by taking advantage of your inability to place and remove orders as quickly as they can. You can do both of these at the same time, but the two competitive advantages are different and separate. Market making is what all this activity is supposed to do, because it is a service provided by the liquidity providers, through the exchanges, to the liquidity consumers. I think the distinctions are clear enough.
  - yummyfajitas 12y ago
    Market makers compete with each other on speed. If market maker A and B both want to provide you liquidity at $10.00/10.05, whichever one is fastest will be the one to get your business. If market maker A wants to compete on price and provide liquidity at $10.003/10.049, too bad. That's illegal. He must compete on speed instead. I wrote some tutorials on mechanics of this a while back, you might find them useful: http://www.chrisstucchio.com/blog/2012/hft_apology.html http://www.chrisstucchio.com/blog/2012/hft_apology.html http://www.chrisstucchio.com/blog/2012/hft_apology2.html http://www.chrisstucchio.com/blog/2012/hft_apology2.html http://www.chrisstucchio.com/blog/2012/hft_whats_broken.html http://www.chrisstucchio.com/blog/2012/hft_whats_broken.html