
High-Speed Trading Isn't About Efficiency—It's About Cheating - gz5
http://www.theatlantic.com/business/archive/2014/02/high-speed-trading-isnt-about-efficiency-its-about-cheating/283677/
======
tikhonj
A few immediate thoughts:

Transaction volume is ultimately not the important metric--revenue is. And,
following [1], it seems that the total revenue for HFT was probably around
$2Billion in 2013--for a whole industry, that's not very much! Measuring
transaction volume is akin to comparing shipping between Amazon and Walmart
ignoring the fact that Amazon ships directly to consumers while Walmart mostly
ships to large Walmart stores.

"...increasing liquidity is the last refuge of bullshitters" is not an
argument--it's an assertion. That was not really supported. Liquidity _is_ a
good thing; the article claims that HFT does not help much because most of the
actual benefits happened before its advance. Of course, considering how
limited HFT revenue is compared to other forms of trading, it's likely that
the benefits are just smaller in proportion.

So I don't see, from the article, that HFT is necessarily socially _useless_.
Rather, I see that it is likely useful in a moderately small way spread out
over _a lot_ of people (most people in the markets). The benefit is not
obvious or concrete, but that doesn't mean it doesn't exist.

Similarly, the article complains about how bots just quote each other prices
without necessarily making a trade. I don't see how this is a bad thing. All
it means is that their quotes are at a much _higher resolution_ than manual
quotes, that's all. This seems like it would generally be a good thing.

Now, I'm not saying that HFT is not without its own risk or issues--they're
just not the issues brought up in the article. Or, in fact, in most popular
articles: popular reporters want to turn HFT into a moral issue and paint HFT
firms as evil manipulators, when they really aren't. The actual risks of HFT
are more structural and technical, which, I suppose, is not great for a broad
audience or lots of pageviews!

It's also not immediately clear that HFT should be banned or how to deal with
it. Many proposals I've heard would reduce liquidity beyond affecting just
HFT, raising real costs for consumers. Ultimately, this is why there has not
been much regulation in the space!

[1]: [http://247wallst.com/investing/2013/03/24/high-frequency-
tra...](http://247wallst.com/investing/2013/03/24/high-frequency-trading-
profits-crushedbut-danger-remains-unchecked/)

~~~
michaelt
See, here's the thing I don't understand about liquidity: If it's so valuable
for trades to execute in microseconds instead of seconds, and the stock
exchanges recognize this value and provide co-location etc to enable it, why
are so many stock exchanges closed for half to two thirds of the day? [1]

Surely the 15+ hour shut downs are a much bigger limit to liquidity than a few
microseconds here and there?

There's obviously no technical reason - I don't see Amazon or Google closing
down their websites from 4pm to 9:30am. And if it's about the release of news,
that only really needs a window of an hour or so.

[1]
[https://en.wikipedia.org/wiki/List_of_stock_exchange_opening...](https://en.wikipedia.org/wiki/List_of_stock_exchange_opening_times)

~~~
sillysaurus2
I worked in the industry for a little while.

At this point, some companies depend on having that daily downtime. Their
whole development is based around the fact that they will have guaranteed
downtime. It's built right into their software stack.

Trying to fiddle with this expected downtime would throw (parts of) the
industry into turmoil.

It's just a historical quirk, but it's probably here to stay.

~~~
golergka
Surely there are ways to get rid of it without the transition being so
traumatic. For example, the change could be announced a few years prior, and
the downtime could go down by an hour per year.

~~~
sillysaurus2
To put things into perspective, the company I worked for responded to bug
reports by hiring a team of people whose role was to manually alter the
database any time a customer reported a data problem. Dozens of times per day.
In other words, instead of fixing the software, it somehow became a reasonable
idea to dedicate employees to fixing the symptoms by hand. It made sense in
hindsight: they were making so much money that they took the path of least
resistance. Paying employees to fix the problem immediately was quicker than
trying to hunt down a competent programmer to try to fix the problem without
causing more problems.

The change would be traumatic no matter how long they are given to plan for
it.

Oh, here's another reason I forgot to mention: You can capture huge profits by
exploiting the opening and closing few seconds of the market. A huge portion
of all daily trades happen within the first few and last few seconds of the
day. So there's a financial incentive to leave things as they are.

------
yummyfajitas
I don't get it. The article first criticizes HFT for making markets rather
than speculating, incorrectly asserting that it's somehow a tax on traders
(hint: don't cross the spread if you don't want to pay the "tax"). Then it
reveals that HFT does speculate - they pay people to do market research and
trade on that basis, which is somehow also evil.

Damned if they do, damned if they don't I guess.

The authors reasoning in going from HFT engaging in speculation to a financial
transaction tax is unclear. He wants to prevent speculation and information
gathering? Or prevent people from speculating quickly?

~~~
ronaldx
The author's point is clear - that HFT adds no value to society ("socially
worthless").

I don't believe that he wants to _prevent_ anything, but he suggests that
trades should be taxed to create some value to society from this. He is
suggesting their value (at the moment) is exclusively to the benefit of making
rich people - who can pay for access early information and technology -
richer.

~~~
vasilipupkin
Traders are already taxed. They make money from their trades and pay income
taxes on this trading. If, however, you tax the trading itself, there will be
less of it, significantly less and, most likely, the total taxes collected
will decrease

~~~
ronaldx
This argument seems to apply equivalently to VAT/sales tax, which in my mind
makes it weak. (Consumers are already taxed on their income etc)

There's no reason to believe total taxes collected will decrease. If actors
still benefit from HFT post-taxation, they will still trade, and pay the tax.

~~~
vasilipupkin
Sorry but you are clueless. Taxing the trading itself will raise the cost of
trading, this making it less profitable if it is less profitable people will
do less of it.

------
vasilipupkin
Here is the problem that I have with this whole "socially useful" line of
reasoning: Do we have philosopher kings or benevolent rules who are able to
accurately designate social usefullness and ban or allow things on the basis
of it? Is facebook or snapchat socially useful? Are hamburgers socially
useful? what about french fries? Whether or not HFT is socially useful is
irrelevant. Since there is no harm to a long term investor from someone
trading 50 millisecond early, etc. , HFT should be left alone to do what it
wants to do.

~~~
joshsegall
It's not about banning or allowing, it's about counting the true costs and
benefits of the trade, not the immediate effects. And you don't need
philosopher kings to do this, just basic math and science. This particular
article may not make a good case for the harm of HFT, but that doesn't mean
there isn't any. And yes, there are serious researchers that are pointing out
hidden costs for things like facebook, hamburgers, and french fries. Those
things may have demonstrable value, but that doesn't mean the value outweighs
the cost or that they are correctly priced. For example, some studies put the
true price of a hamburger at around $30 based on the burden put on healthcare
and the environment, which are ultimately paid by other people. With perfect
information, those costs should be factored into the trade, but they aren't.
So, while HFT might have some small benefit to market liquidity as claimed by
other comments, I can easily believe there are hidden costs that would
outweigh such small benefits. I don't have any evidence to provide in this
specific case, but I would support research to investigate whether we are
overcounting the benefits or undercounting the costs.

~~~
vasilipupkin
Right, by this logic literally anything might have a hidden cost that exceeds
the demonstrable benefit. The onus is on the ones crying wolf to present
concrete evidence. Otherwise, we will end up living in Soviet Union or Nazi
Germany ( yes yes I know, Godwin's law)

------
kasey_junk
I assume folks who advocate for a transaction tax don't actually want less
transactions, rather they want more "real" transactions and a less
artificially volatile market place.

Unfortunately, a transaction tax would create the exact opposite of that
situation. The hypothesis that if there were a transaction tax there would be
less transactions is incorrect. What would happen is that transaction
quantities would get bigger in order to overcome the new added cost. These
larger transactions would magnify the risk at play in the market place. This
in turn would raise the reward for being able to pull out of quotes faster
and/or to misrepresent the riskiness of your trading strategy.

So a transaction tax would actually incentivize more "false" liquidity and
work to the betterment of companies that are more risky.

What HFT systems actually do, is allow firms to "pay" for priority of an order
at a price level, by investing in network infrastructure/algorithms. If you
want remove that advantage the easiest way would be a system where you
transparently pay for priority of an order. The system with the least likely
negative side impacts of this would be making arbitrary price level sizes.
That is, instead of quoting down only the penny level, let people quote
arbitrary (or some fixed but very small) decimals of a penny. That way if you
really want to pay up for priority, you can just increment your order slightly
and actually pay for the privilege.

~~~
minimax
We actually have a system similar to what you describe in your last paragraph
with the three "inverted" US equity exchanges where liquidity providers pay a
fee and liquidity takers receive a rebate. It means that shares posted to the
inverted exchanges are cheaper (net of fees) to aggressors than shares posted
to other exchanges, so liquidity takers with a smart order router will look
first to the inverted exchanges before the other exchanges.

------
gaius
Lost me at _That brings us to high-frequency trading (HFT) hedge funds. These
funds use computer algorithms—a.k.a.: algobots_

No-one says this. I'm not involved in HFT myself but I know a bunch of people
who are, there is a jargon word, but it's not that.

~~~
crntaylor
You tend to hear high frequency traders refer to the code that makes pricing
and trading decisions as a _system_ , or _signal_ , or _model_ , or (very
occasionally) _algo_ (all refer to slightly different things) but I have never
heard them refer to the code that makes trading decisions as a _bot_ or
_algobot_.

Source: I used to work in high frequency trading.

------
stormqloud
Anybody that has looking into things like the voodoo of "doji candlestick
strategy" etc realizes that the entire market is full of people reading tea
leaves.

99% of the portfolio managers, investment professionals have no more luck in
picking stock then HFT or these other strategies.

It's basically gambling in one form or another. The ony way to get ahead in
that world is to cheat.

HFT by itself isnt; a problem. When juiced with regular insider information,
front running your own clients etc it's a massively profitable biz.

The biggest crowd that hates HFT is the stock pickers, day traders (any left?)
and others that work int he investment biz.

They have had a nice scam going for the last hundred years and you are ruining
their party.

Haw can they go have cocktails at 4 pm every day when computer programmers are
working hard all night long?

The other group of course are the luddites. Afraid of any advance in
technology. Other favorite causes, "Kids and violent video games". "The 100
mile diet" "environmental anything".

------
bbosh
The primary function of the stock market is to exchange ownership (shares) in
a company. It's odd that we seem to have forgotten that. What value is there
in a computer owning a stock for 10 milliseconds?

~~~
drunkpotato
I've read elsewhere on here that the value of high-frequency trading is that
it reduces transaction costs and increases liquidity in the market. I.e. it
makes it easier for the humans to buy and sell at the prices they wish to buy
and sell at.

Assuming that's true, the question then becomes what are the costs and
externalities of HFT and, in balance, are we willing to make those trade-offs?
I haven't seen anything addressing those issues yet, but I haven't been
looking either.

HFT experts want to weigh in, pro/con/otherwise?

~~~
yummyfajitas
Since most of the people commenting here don't seem to even understand HFT,
I'll just leave this here (a tutorial I wrote a while back):

[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)

~~~
rtpg
you should probably link part 2 from the end of part 1, if not it's not
obvious that you did write part 2.

~~~
yummyfajitas
Thanks.

------
radikalus
The clueless preaching to the more clueless?

Early data access has been around for a decade and generally has NOTHING to do
with HFT. Events desks typically have very different architecture than other
groups in HFT, and, well, are a very very small cog.

------
scotty79
> I'm pretty sure—or at least I hope—that Red Auerbach was kidding when he
> told a gym full of kids to cheat to get ahead.

He didn't tell them to cheat. He told them that to gain competitive advantage
you cheat. Games are mostly random so you can get ahead without getting
competitive advantage. And you don't even need to get ahead to have almost all
benefits of playing the game or even some other benefits that you can't get
when you have an advantage.

I think that attitude towards cheaters is pretty much an american (maybe
british?) cultural thing. Lot's of people were successfully taught to be
honest, and if they can't be honest to defend the ideal of honesty by teaching
honesty and never admitting their dishonesty. People who are honest about
their dishonesty meet exasperation and disbelieve.

> If a company sold hedge funds an early look at their earnings, it'd be
> insider trading. But when a third-party like Business Wire sells hedge funds
> an early, albeit split-second, look at corporate earnings, it's perfectly
> legal. It's nuts.

Nuts is the fact that insider trading is illegal. It's unenforceable idea of
how to make intrinsically unfair game appear sort of fair. It comes from the
fact that shares are not as attractive as they need to be on their own.
Possessing part of some company and getting dividends when the company decides
to pay them is not incentive enough to shell out your cash and give it to the
company that needs the cash to develop.

Since people love to participate in lotteries (before taxes it was the way
money was gathered for expensive projects, people were just voluntarily were
giving their money away in hopes of winning the big prize) they attached sort
of casino to the idea of shares. The game is mostly: guess future ratio of
supply and demand for pieces of paper. But people don't like to play in the
casinos that are known to rig the games and despite the fact that price is
random as it depends on so many different pieces of information some
information can have some predictable influence. So casino (exchange and
companies) pinky swear to prevent anyone from acting on the knowledge that
gamers didn't have chance to familiarize themselves with. It works. I makes
the game look fair. Of course insider still trading exists because you can't
tell it apart from luck if you can't trace where the information leaked. And
you can do that only rarely.

------
mjstahl
I don't know how I personally feel about HFT. I don't have a high enough view
of the system as a whole to make a determination if HFT is or will be a
problem.

But the mention
([http://www.cnbc.com/id/100809395](http://www.cnbc.com/id/100809395)) of
Reuters selling data to customers 2 seconds before the conference calls (which
occurr 5 minutes before the public receives the data) unsettles me a bit. Two
seconds isn't a long time except when you consider that HFT operates in milli,
micro, or maybe even nano seconds.

I am not sure whether I would go as far as to consider it insider trading, but
I do think the conference call and the data meant for HFT should all be
released at the same time as the public data.

~~~
maxerickson
But that isn't public data, it is private research.

That a university is doing the work muddies the water, but pretend that a
private institute is selling access to its research, what benefit is there in
telling it how to sell the data?

------
_random_
I don't mind one of the few industries where developers can get relatively
good money without being a founder (here in UK).

------
Tycho
No new insights in this article.

What I've been thinking about recently though is that the problems HFT
companies work on may have unexpected benefits in other fields. For instance
they are working on things like machine learning, transmission speed, long
range networking, mathematical modelling, and software. If we were to ban HFT
we would lose the potential upside of all this. In the words of NN Taleb, this
sort of 'stochastic tinkering' is primarily how scientific progress is made.

------
kyleblarson
Key quote: "Now, what they do is strictly legal".

This article felt like it was written by a college freshman who just took
their first class on "social justice".

------
ChristianMarks
An example of privileged, well-connected parties systematically winning
asymmetric zero-sum games against the not so well connected.

I'll believe that HFT adds liquidity to the market when the typical retirement
horizon is 15 milliseconds. HFT proponents seem not to (or pretend not to)
understand diminishing returns where "adding liquidity to the market" is
concerned.

------
philrapo
Distributed exchange architecture is an interesting alternative:

[https://ripple.com/blog/ripples-distributed-exchange-and-
the...](https://ripple.com/blog/ripples-distributed-exchange-and-the-high-
frequency-trading-arms-race/)

When there's no central location towards which orders need to race to get time
stamped, the whole low latency arms race seems unnecessary.

There's also no central place to co-locate servers.

Some of the existing traditional (centralized) exchanges are making 20-30%+ of
their revenues from co-location and data fees. So they have little incentive
to change. They cater to HFT because it's a big driver of their bottom line...

------
farginay
He starts with an anecdote about cheating and then lays out HFT an implies it
is cheating without saying how. If he had to defend his assertion that it is
cheating he wouldn't have an article.

------
zacinbusiness
I've never really understood the stock market. Is this basically how it works?

A person can make or sell things, but that person is limited in the scope of
their business by their available capital. Thus, they can increase their
capital by either securing a business loan or by making their company
"public." Securing a business loan is risky, because they will still have to
pay back the loan regardless of whether or not their company makes any money.
Going public carries additional risks, but at least they aren't on the hook if
the business fails - and there's an added benefit of the potential for
enormous gains in capital which can further increase their business potential.

So, the person "goes public" which is extremely complex and time consuming,
but let's say they are able to convince 100 people that they should each buy a
"share" of the company. This means that the more money that the company earns
in profit, that a little bit of that profit is "owned" by each person who owns
a share. Right? (I am legitimately asking here, because as I said I really
don't understand much of the way it works.)

So, now we have stock exchanges. These are places that people can buy, sell,
or trade stocks of different companies for cash or other assets? I own one
share of Company A and that share is worth $51 right now. Later in the day,
however, we see that company A has earned a little bit more money than we
thought it was going to, and so now my stock is worth $53. And I originally
purchased the stock for $47, so I can potentially sell that stock for a $6
profit, or I can hang on to it and hope that it goes a little higher.

However, humans can only act so quickly, and day-traders and short-sellers act
on stocks in the span of minutes or hours. So if I purchase 10,000 shares of
Company B at 10:00 for $5 each, and then sell those same 10,000 shares back at
10:04 for $5.02 each, then I have made a small profit. And large firms do this
hundreds of times each day, with dozens of companies, and likely tens of
thousands of stocks. Right?

So, HFT does the same thing. Except, instead of making a purchase-sell
decision every few minutes, they do it every few microseconds. And the returns
per transaction are something like... .0000034 per share (this is a guess),
but over tens of thousands of shares, and millions of times a day. Right?

This, however, is where my understanding breaks down completely.

HFT obviously benefits a company that can wield it. If my hedge fund can hire
the programmers, run the servers, and buy the licenses to the data then I
stand to make huge profits for a minimal investment when my HFT "algobots
(lol)" do their thing. But I don't understand how this benefits the rest of
the market?

I'm guessing that most of these HFT bots are not being run by small-time
investors, and in fact that the trades made by small-time investors will be
heavily influenced by the HFT trades that are made in-between the time the guy
using E-Trades can point on the "Buy!" button and the time he can click on it.

And as a consumer who does not participate in the stock market (in that I do
not have an investment portfolio, I realize that the stock market influences
me regardless of whether or not I put money into it), I really don't get how
HFT helps me.

What it looks like to me, is that players who have the most money, and who
have the best technology will have a benefit over players who lack those
resources. And so while there's no evidence (that I'm aware of) that these
HFT-using companies are committing any malfeasance, it looks like the natural
side-effect is that the market becomes more one-sided.

I would liken this to a professional athlete using steroids (let's pretend
that steroids aren't illegal). Steroid use may stem from the player simply
wanting to maximize their ability to use their body, and so they enhance their
muscles and work hard to be able to control them. This player isn't actively
trying to cheat, he is simply using technology to overcome a natural hurdle
(let's also assume that this same player has, through hard work, literally
pushed their body to the limit of what it can naturally achieve). However, a
similar player who has also pushed their body to the limit is either unable or
unwilling to use steroids, and thus they are unable to compete against the
other due to the slight technical advantage.

Is this a true analogy?

~~~
shabble
I'm not entirely clear on the exact process either, but I think your initial
summary has it mostly correct. There are additional complexities in Share
Dividends (you receive a fraction of the companies profits proportional to
your number of shares owned, which incentivises not-selling, to a point)

The basic issue that HFT (and markets in general) seek to solve is liquidity -
the ability to buy & sell when you want, rather than having to wait while a
deal is worked out. Consider the differences in process when buying/selling a
commodity such as gold, vs buying a particular house.

There's a good overview of the mechanics & benefits of [HF]T in the 'A High
Frequency Trader's Apology'[0] series, written by HN member yummyfajitas.

[0]
[http://www.chrisstucchio.com/blog/2012/hft_apology.html](http://www.chrisstucchio.com/blog/2012/hft_apology.html)

~~~
Lazare
That's an excellent series of posts. Thanks for the link!

------
moron4hire
HFT is more likely about front-loading their own customers' orders than it is
about reacting efficiently to price changes.

------
Houshalter
The problem is someone is _always_ going to get important information and act
on it first in a market. A tax wouldn't stop that, it would just make small
transactions more expensive (for both parties.) I don't know if this is a real
problem or how to fix it but this article is entirely useless.

------
omilu
maybe i didn't read the piece accurately enough, but i don't get why it's
cheating. It's about ingenuity and the ability to allocate money to where you
think the market will move. It's been this way since the beginning. We do the
samething with our 401k.

------
throwwit
Are there any protections in place for if an investor is hovering a cursor
over a buy button that the stock doesn't get pumped up?

------
dschiptsov
"High-Speed" is redundant.)

With a _very few_ exceptions, modern trading is a form of cheating, based on
mass-media powered deceptions (we have full-time satellite channel - TLC,
which promotes premium (read: overpriced) and/or "chap-but-healthy" fast-food
chains) and "optimizations" such as purchasing a "30% meat stuff" at a penny
price and adding lots of spices and synthetic sauces, etc.)

Why should it be different in finance? Especially in speculative trading.)

------
PythonicAlpha
The stock exchange has just become the ultimate casino today. Yesterday, stock
exchange helped to build companies, to have some security against bad crops
and so on ... but that has changed. More and more money is just made by
gambling and the more money is made, the more money is again put into the big
gambling machine. It is legal, but just gambling and we all have to pay the
price, because the gamblers carry the wealth of the Earth away -- and the
others are left empty.

------
arikrak
HST doesn't sound that useful, but the article didn't really say much or show
that they're cheaters.

------
stuaxo
In other news gravity works on apples and spicy food can be enjoyable.

------
michaelochurch
Actually, HFT is socially useful in the same way that Cold War research, even
though most of it never went anywhere, is.

It bids up the price of talent, and that's an inherent social good because it
means there is a chance for smart people to get into decision-making positions
(which, otherwise, go to entitled, and mostly untalented, incumbents and their
shitty offspring). Google and Amazon would _not_ be paying $140k per year for
mid-career software engineers, were it not for the hedge funds paying $200k.

VC-istan is terrible, with founders lucky to get 10% and earliest employees
getting 0.1-1%, but if Wall Street wasn't absorbing most of the top talent
(and it is) those numbers would be closer to 1% and 0.001-0.05%. Instead of
very few people getting rich in the tech lottery, it'd be almost no one,
because the founders and early engineers would have zero leverage.

The HN crowd likes to assume that talented people will, as if it were a law of
nature, have options to rise economically and socially. It's not so. If it
weren't for socially useless talent vampires like HFT and online ad targeting,
talent would have even _less_ leverage against the good-ol'-boy networks and
widespread stagnation would ensue.

(High levels of funding, probably originating from governments at first, for
basic research would achieve the same effect in a socially use _ful_ way, but
I wouldn't hold my breath.)

~~~
smoorman1024
Interesting way too take the conversation but valid.

