12 ms·

Before HFT, there was only a few market makers, which meant the bid-ask was high (if you wanted to buy or sell right now, you'd pay more), liquidity was low (it

Before HFT, there was only a few market makers, which meant the bid-ask was high (if you wanted to buy or sell right now, you'd pay more), liquidity was low (it'd be harder for you to get in or out of a large position and in hard times it would take longer for the market to recover - See 80s crash vs flash crash). With HFT, there's a lot more competition over the bid ask spread. Trading firms are essentially in an increasingly expensive fight over pennies, which is good for everybody else, since it's cheaper prices, more liquidity, and a more efficient market. The people it's bad for is the old-school style brokers (which are effectively gone now) and large investmant banks who have a fundamental view on the market (they need to be smarter about executing since the market is more efficient and reacts much more quickly to their buying and selling).

djrobstep 12y ago
Which brings us to the next question: What is the social benefit of a slightly smaller bid-ask spread and a few milliseconds of faster liquidity? And are these benefits worth the massive amount of wealth extraction from the rest of us that HFTers are engaged in?
- gd1 12y ago
  That's pretty simple to answer. The smaller the spread, the less going into the pocket of middlemen. Which is where we are now. Less going into the pockets of middlemen than ever before. >And are these benefits worth the massive amount of wealth extraction What "massive amount of wealth extraction"? Are you just making shit up?
  - jeffreyrogers 12y ago
    > What "massive amount of wealth extraction"? Are you just making shit up? I think he was probably just confused about how HFT works, since unless you're familiar with it it is very easy to assume it is screwing someone.
- deleted 12y ago
  [deleted]
  - danbruc 12y ago
    The total peak profit of HFT companies is usually estimated a bit north of 5 billion Dollar in 2009. After that it fell to about 1 billion Dollar per year as far as I can tell. For me 5 billion Dollar or even only 1 billion Dollar per year seems quite a lot for not producing a single salable good and service. The 2009 profit was the equivalent of 175,000 average yearly US incomes, i.e. 175,000 people worked somewhere on factory floors to produce the profits for HFT companies.
    - gd1 12y ago
      Can you quote me some stats on how much the equivalent middle men made in earlier decades? Both absolute and relative to the size of the market?
      - tptacek 12y ago
        To get a sense of how much worse it was prior to automated trading, Google: [odd eighths scandal].
        lrm242 12y ago
        You might also google stories about market makers not answering their phones during times of high volatility. There is this strange obsession over "how it used to be", as if it was better having people in the mix matching orders and providing that liquidity. The fact of the matter is, those people were as deeply flawed as any algorithm. The major difference today is that there is significant competition to provide liquidity in US equities markets and that liquidity can be extracted ON DEMAND by any trader. Did you know, in the past it was NOT POSSIBLE for you to post a limit order and have it displayed in the order book unless you were an anointed market maker on an exchange? [edit: this was meant as a reply to gdl not tptacek]
        danbruc 12y ago
- kasey_junk 12y ago
  > And are these benefits worth the massive amount of wealth extraction from the rest of us that HFTers are engaged in? Unless you were a specialist market maker or pit trader on an exchange there hasn't been any "wealth extraction". Quite the opposite, HFT has taken a system built on being tall, having good connections, and understanding an arcane set of hand signals (not to mention very high fees) and replaced it with a ruthlessly efficient automated system based on being good at writing software and planning network setups (and brought the fees down with it). For the vast majority of market participants HFT has been a massive upgrade over the old system and dramatically lowered the cost of trading.
- henrik_w 12y ago
  The book "Flash Boys" by Michael Lewis chronicles the rise of HFT, and basically argues that it doesn't really provide that much of a benefit. http://www.amazon.com/Flash-Boys-Michael-Lewis/dp/0393244660/ http://www.amazon.com/Flash-Boys-Michael-Lewis/dp/0393244660...
  - kasey_junk 12y ago
    Standard PSA about "Flash Boys". If you are interested in HFT you are better off quite literally not reading that book than reading it. It is very biased and largely inaccurate. If you want to read narrative non-fiction about HFT, "Dark Pools" by Patterson, which also has its mistakes, is much better.
    - henrik_w 12y ago
      Are there any other resources you can recommend for learning more about HFT?
      - kasey_junk 12y ago
        For blog post style reading 'yummyfajitas' series on HFT is good: https://www.chrisstucchio.com/blog/2012/hft_apology.html https://www.chrisstucchio.com/blog/2012/hft_apology.html For technical books: - Trading & Exchanges by Harris (a little out of date) - Algorithmic Trading & DMA by Johnson. On the narrative non-fiction side Dark Pools is basically it.
        henrik_w 12y ago
        Great, thanks!
      - paperwork 12y ago
        There are several books which speak about HFT at a high level. If you are curious about the actual mechanics of stock exchanges and (a bit about) how various parties make their money, I wrote a bit about it at http://falconair.github.io/2015/01/05/financial-exchange.html http://falconair.github.io/2015/01/05/financial-exchange.htm...
- lrm242 12y ago
  Middlemen have always existed in markets. The middlemen have changed, but as you rightly point out, they now take SIGNIFICANTLY LESS than they used to because competition has forced spreads down to next to nothing. You pick: pay a 0.30 spread on a NYSE listed stock or a 0.01. It's sort of a no-brainer. The thing that most people seem to be upset about is that now market makers generally have few to no obligations to provide liquidity and they are drastically smarter than they used to be. Ultimately, unless you are slinging enormous blocks, if you send a marketable order through a retail broker these days you are almost always going to get a better fill than the displayed market. Likewise, if you are a large trader you have to be more sophisticated about how you fill your orders, you can't just lift 100k shares even when 300k are displayed unless you do so with a semi-intelligent execution algo (note: these are everywhere these days, and not using one brings into question the trader/brokers abilities and whether they are even qualified to be in the market).
- saryant 12y ago
  If HFT lets Vanguard lower their costs, the savings of which are passed on to their customers, that's more money in the retirement accounts of regular people. I just got an email that the expense ratio of my Vanguard target date fund is going down, so costs were reduced somewhere.
bradleyjg 12y ago
> The people it's bad for is the old-school style brokers (which are effectively gone now) and large investmant banks who have a fundamental view on the market (they need to be smarter about executing since the market is more efficient and reacts much more quickly to their buying and selling). What about index funds rebalancing their portfolios? (Honest question)
- tptacek 12y ago
  The Chief Investment Officer at Vanguard, of VFINX fame and widely considered to be among the most trustworthy fund companies, stated that HFT had improved things for firms like theirs.
- lrm242 12y ago
  Index funds, or really anyone with long horizon investment objectives, are major benefactors of HFT. Note, "HFT" really means nothing in modern context, but regardless, what most mean are "Electronic Market Makers". Long horizon investors benefit directly from being able to access cheap and plentiful liquidity pretty much whenever they want to. Spreads are tighter because there is now significant competition to provide that liquidity.
- reverend_gonzo 12y ago
  By "fundamental view on the market", I mean those who have done research and know that the price of something is under- or over-valued. These are generally known as informed investors. When they decide some security/commodity/etc is mispriced, they will immediately put a lot of money into that idea, ideally (for them) before the market adapts. With HFT, the market adapts a lot quicker than before, which is better for general investors (who are uninformed investors) as they get a price that's closer to the real value. Index funds don't have a view on specific securities. They don't perform research to try to get an edge. Instead, they believe that the market is generally efficient, the and they try to lower risk by diversifying across a large portfolio of somewhat related securities, and get a return that closely matches the overall market. As such, HFT helps them by givings them better bid-ask spreads and also providing prices that are closer to the actual value of an asset. Note that those performing fundamental analysis and buying millions of dollars worth of assets aren't SOL. They just have to be smarter about how they execute.

djrobstep 12y ago

Which brings us to the next question: What is the social benefit of a slightly smaller bid-ask spread and a few milliseconds of faster liquidity? And are these benefits worth the massive amount of wealth extraction from the rest of us that HFTers are engaged in?

gd1 12y ago
That's pretty simple to answer. The smaller the spread, the less going into the pocket of middlemen. Which is where we are now. Less going into the pockets of middlemen than ever before. >And are these benefits worth the massive amount of wealth extraction What "massive amount of wealth extraction"? Are you just making shit up?
- jeffreyrogers 12y ago
  > What "massive amount of wealth extraction"? Are you just making shit up? I think he was probably just confused about how HFT works, since unless you're familiar with it it is very easy to assume it is screwing someone.
deleted 12y ago
[deleted]
- danbruc 12y ago
  The total peak profit of HFT companies is usually estimated a bit north of 5 billion Dollar in 2009. After that it fell to about 1 billion Dollar per year as far as I can tell. For me 5 billion Dollar or even only 1 billion Dollar per year seems quite a lot for not producing a single salable good and service. The 2009 profit was the equivalent of 175,000 average yearly US incomes, i.e. 175,000 people worked somewhere on factory floors to produce the profits for HFT companies.
  - gd1 12y ago
    Can you quote me some stats on how much the equivalent middle men made in earlier decades? Both absolute and relative to the size of the market?
    - tptacek 12y ago
      To get a sense of how much worse it was prior to automated trading, Google: [odd eighths scandal].
      - lrm242 12y ago
        You might also google stories about market makers not answering their phones during times of high volatility. There is this strange obsession over "how it used to be", as if it was better having people in the mix matching orders and providing that liquidity. The fact of the matter is, those people were as deeply flawed as any algorithm. The major difference today is that there is significant competition to provide liquidity in US equities markets and that liquidity can be extracted ON DEMAND by any trader. Did you know, in the past it was NOT POSSIBLE for you to post a limit order and have it displayed in the order book unless you were an anointed market maker on an exchange? [edit: this was meant as a reply to gdl not tptacek]
      - danbruc 12y ago
kasey_junk 12y ago
> And are these benefits worth the massive amount of wealth extraction from the rest of us that HFTers are engaged in? Unless you were a specialist market maker or pit trader on an exchange there hasn't been any "wealth extraction". Quite the opposite, HFT has taken a system built on being tall, having good connections, and understanding an arcane set of hand signals (not to mention very high fees) and replaced it with a ruthlessly efficient automated system based on being good at writing software and planning network setups (and brought the fees down with it). For the vast majority of market participants HFT has been a massive upgrade over the old system and dramatically lowered the cost of trading.
henrik_w 12y ago
The book "Flash Boys" by Michael Lewis chronicles the rise of HFT, and basically argues that it doesn't really provide that much of a benefit. http://www.amazon.com/Flash-Boys-Michael-Lewis/dp/0393244660/ http://www.amazon.com/Flash-Boys-Michael-Lewis/dp/0393244660...
- kasey_junk 12y ago
  Standard PSA about "Flash Boys". If you are interested in HFT you are better off quite literally not reading that book than reading it. It is very biased and largely inaccurate. If you want to read narrative non-fiction about HFT, "Dark Pools" by Patterson, which also has its mistakes, is much better.
  - henrik_w 12y ago
    Are there any other resources you can recommend for learning more about HFT?
    - kasey_junk 12y ago
      For blog post style reading 'yummyfajitas' series on HFT is good: https://www.chrisstucchio.com/blog/2012/hft_apology.html https://www.chrisstucchio.com/blog/2012/hft_apology.html For technical books: - Trading & Exchanges by Harris (a little out of date) - Algorithmic Trading & DMA by Johnson. On the narrative non-fiction side Dark Pools is basically it.
      - henrik_w 12y ago
        Great, thanks!
    - paperwork 12y ago
      There are several books which speak about HFT at a high level. If you are curious about the actual mechanics of stock exchanges and (a bit about) how various parties make their money, I wrote a bit about it at http://falconair.github.io/2015/01/05/financial-exchange.html http://falconair.github.io/2015/01/05/financial-exchange.htm...
lrm242 12y ago
Middlemen have always existed in markets. The middlemen have changed, but as you rightly point out, they now take SIGNIFICANTLY LESS than they used to because competition has forced spreads down to next to nothing. You pick: pay a 0.30 spread on a NYSE listed stock or a 0.01. It's sort of a no-brainer. The thing that most people seem to be upset about is that now market makers generally have few to no obligations to provide liquidity and they are drastically smarter than they used to be. Ultimately, unless you are slinging enormous blocks, if you send a marketable order through a retail broker these days you are almost always going to get a better fill than the displayed market. Likewise, if you are a large trader you have to be more sophisticated about how you fill your orders, you can't just lift 100k shares even when 300k are displayed unless you do so with a semi-intelligent execution algo (note: these are everywhere these days, and not using one brings into question the trader/brokers abilities and whether they are even qualified to be in the market).
saryant 12y ago
If HFT lets Vanguard lower their costs, the savings of which are passed on to their customers, that's more money in the retirement accounts of regular people. I just got an email that the expense ratio of my Vanguard target date fund is going down, so costs were reduced somewhere.

bradleyjg 12y ago

> The people it's bad for is the old-school style brokers (which are effectively gone now) and large investmant banks who have a fundamental view on the market (they need to be smarter about executing since the market is more efficient and reacts much more quickly to their buying and selling). What about index funds rebalancing their portfolios? (Honest question)

tptacek 12y ago
The Chief Investment Officer at Vanguard, of VFINX fame and widely considered to be among the most trustworthy fund companies, stated that HFT had improved things for firms like theirs.
lrm242 12y ago
Index funds, or really anyone with long horizon investment objectives, are major benefactors of HFT. Note, "HFT" really means nothing in modern context, but regardless, what most mean are "Electronic Market Makers". Long horizon investors benefit directly from being able to access cheap and plentiful liquidity pretty much whenever they want to. Spreads are tighter because there is now significant competition to provide that liquidity.
reverend_gonzo 12y ago
By "fundamental view on the market", I mean those who have done research and know that the price of something is under- or over-valued. These are generally known as informed investors. When they decide some security/commodity/etc is mispriced, they will immediately put a lot of money into that idea, ideally (for them) before the market adapts. With HFT, the market adapts a lot quicker than before, which is better for general investors (who are uninformed investors) as they get a price that's closer to the real value. Index funds don't have a view on specific securities. They don't perform research to try to get an edge. Instead, they believe that the market is generally efficient, the and they try to lower risk by diversifying across a large portfolio of somewhat related securities, and get a return that closely matches the overall market. As such, HFT helps them by givings them better bid-ask spreads and also providing prices that are closer to the actual value of an asset. Note that those performing fundamental analysis and buying millions of dollars worth of assets aren't SOL. They just have to be smarter about how they execute.