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Exchanges subsidise market-making, because that is the unquestionably beneficial activity. But the high-frequency aspect of it is separate from the algorithmic

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
    - deleted 12y ago
      [deleted]
    - dllthomas 12y ago
      "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." Unless the allocation is pro-rata, but it usually isn't.
  - harryh 12y ago
    By being very fast at taking into account new information as fast as possible market makers reduce their risk, thus allowing them to offer better prices. Price and speed are closely intertwined.
- crdoconnor 12y ago
  The vast majority of HFT trades are market making - with razor thin margins. The vast majority of profit making trades do not involve market making, however - they usually involve trading on an information advantages, or spearing a whale (large institutional investor trying to buy or sell large amounts of stock). It's good to mix in a large dose of almost-zero-profit market making trades in with your more ethically and legally dubious trades. It helps cover your tracks - both from regulators and other market participants.
  - kasey_junk 12y ago
    Do you have a citation for this? What does "spearing a whale" even mean? What is ethically or legally dubious about electronic market making? Please just come out and say what you think HFT is, how it works and why it is ethically or legally dubious, because your claims in this thread border on the hysterical.
    - conistonwater 12y ago
      There was a rather famous incident with a trader nicknamed "London Whale", who accumulated a massive position in the CDS market, which then led JPMorgan Chase to lose immense amounts of money on the trade. The money went to those people that correctly figured out what was going on in the market. In general, if you know important information about someone else's positions, you can sometimes use that information to profitably trade against them.
      - kasey_junk 12y ago
        The London Whale did not involve HFT. In fact, it is a rather good example of how little HFT matters in the world of finance. One division at Chase (and if you believe them 1 man) cost the company more in 1 year than HFT makes in profits. The other sides of that trade were not HFT firms, but other human driven trading funds. So of course information advantages allow you to make money, that's the point of the market and it is no more unethical or illegal when an HFT makes money than it is when those human traders were on the other side of the London Whale.

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
  - deleted 12y ago
    [deleted]
  - dllthomas 12y ago
    "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." Unless the allocation is pro-rata, but it usually isn't.
- harryh 12y ago
  By being very fast at taking into account new information as fast as possible market makers reduce their risk, thus allowing them to offer better prices. Price and speed are closely intertwined.
crdoconnor 12y ago
The vast majority of HFT trades are market making - with razor thin margins. The vast majority of profit making trades do not involve market making, however - they usually involve trading on an information advantages, or spearing a whale (large institutional investor trying to buy or sell large amounts of stock). It's good to mix in a large dose of almost-zero-profit market making trades in with your more ethically and legally dubious trades. It helps cover your tracks - both from regulators and other market participants.
- kasey_junk 12y ago
  Do you have a citation for this? What does "spearing a whale" even mean? What is ethically or legally dubious about electronic market making? Please just come out and say what you think HFT is, how it works and why it is ethically or legally dubious, because your claims in this thread border on the hysterical.
  - conistonwater 12y ago
    There was a rather famous incident with a trader nicknamed "London Whale", who accumulated a massive position in the CDS market, which then led JPMorgan Chase to lose immense amounts of money on the trade. The money went to those people that correctly figured out what was going on in the market. In general, if you know important information about someone else's positions, you can sometimes use that information to profitably trade against them.
    - kasey_junk 12y ago
      The London Whale did not involve HFT. In fact, it is a rather good example of how little HFT matters in the world of finance. One division at Chase (and if you believe them 1 man) cost the company more in 1 year than HFT makes in profits. The other sides of that trade were not HFT firms, but other human driven trading funds. So of course information advantages allow you to make money, that's the point of the market and it is no more unethical or illegal when an HFT makes money than it is when those human traders were on the other side of the London Whale.