

How High Frequency Trading Benefits All Investors - ad
http://www.tradersmagazine.com/news/high-frequency-trading-benefits-105365-1.html?zkPrintable=true

======
brownegg
I am a professional trader, and by almost any definition I operate in the
"high frequency" space. First, let's establish that Traders is an authority on
the real world of financial markets in the same sense that PC World is an
authority in the world of technology.

So I've not read the linked article, nor am I going to. But I will say this:
HFT does perform a viable, necessary economic function. A well-functioning
capital market absolutely requires this kind of activity.

HOWEVER, like most mainstream-media memes, what gets talked about / opined on
is almost never relevant to what is actually important and/or controversial:
in this case, the question of whether HFT creates a two-tiered playing field
where individual (read: non-technically-sophisticated) investors suffer at the
hands of the "pros".

Most arguments against HFT basically say that algorithms are purely predatory
and only serve to hurt the performance of large investors. This is naive at
best and deceptive at worst; for every share I purchase "ahead of" a big
order, a seller has been filled at the price he desired. Every transaction has
two sides; you can't just pick one and say they got screwed. The other side
has to have done as well as the other did poorly (assuming a fictional
frictionless world).

The reality is that HFT requires tons of knowledge and a technology budget of
seven figures per annum _at the barest minimum_ , and this provides a very
real barrier to entry. What should be talked about, but never is: is that ok?
Why or why not? What ramifications does it have?

~~~
coreyrecvlohe
I'm not a professional trader, like yourself, but from what I've gathered over
the last several years of HFT coming up in the news is that it is in fact a
low-barrier to entry field. All you need is a decent quant, application
designer, and some co-located machines as close as you can get them (and other
easily acquired amenities.) So I could make a reasonable bet you could open a
HFT firm with a couple hundred thousand, plus the talent. (And I've confirmed
this with a few hedge fund guys, and they pretty much agreed.)

And I do completely understand the argument for liquidity: more transactions =
more accurate price discovery. But I think problem here is that this entire
field is black box, meaning property trading algorithms and trading patterns
can and are used within the system. This can allow a trading AI to go out into
the market place, look for pattens, and to create and cancel millions of
orders within the fraction of a second.

I'm sure you know about the former Goldman Sachs programmer who was charged
with theft by the FBI. It was totaled at around 32 megabytes of software code.
Not very much. But Goldman insisted that if this code got out into the market
it would be detrimental to their business and violate their trades secrets
confidentiality clause. Not to mention Goldman's largest profit center in
their business is their proprietary trading desk, which is heavily into HFT.

My contention is that if we are really interested in a utility that uniformly
benefits the market, then let's have an open source platform that provides
that, so we can verify that any of these firms aren't "front-running" their
trades.

Thats my opinion. I think a lot of the debate over HFT is just filler, it
doesn't matter. The guys who are hip to the scene are already making a killing
on it now, and it may last a few more years before we begin to regulate.

~~~
brownegg
Sure, you can get the point where you're placing trades for a couple hundred
grand... as long as a lot of things fall into place for you. Writing your own
apps? Unless you think you can get talent that is willing to roll the dice and
possibly be out of a job in a couple months, you're looking at 12 months x the
cost of those people... how much is that? $500k? This isn't framework-style
assembly of components. If you want to be competitive, the SLOWEST things you
can use are linux and C++.

Colocation agreements usually require a minimum commitment of 12-36 months...
probably $10k/mo if you have some rudimentary failover and the like.

I'd say anyone who tries with less than 12 months and $500k to truly burn has
0 shot at success. And if you want to really do it right, you're looking at an
order of magnitude more.

------
pdoughtie
Keep in mind that this is appearing in a magazine that is successful because
of the success of high frequency trading and that the article is written by
the member of a company that bases its profits on the ability to conduct high
frequency trading.

~~~
rgarcia
<http://www.paulgraham.com/disagree.html>

DH1

~~~
_delirium
PG articles are not scripture that you can just link to a quote from to end
debate, you know. =]

I do think it's legitimate to look at sources for articles, especially when
there are _strong_ conflicts of interest.

~~~
falsestprophet
"Everyone must submit himself to the governing authorities, for there is no
authority except that which God has established."

Romans 13:1

~~~
gjm11
The Bible is not scripture that you can just link to a quote from to end
debate, you know.

~~~
falsestprophet
Stack Overflow

------
barrkel
I am somewhat confused by this double-negative: "No serious market observer
disputes the claim that volatility would not be higher without the liquidity
provided by high frequency traders."

The author seems to be trying to say that high frequency traders reduce
volatility. But I parse the claim differently: it seems to me to be saying
that volatility could only be lower in the absence of liquidity from high
frequency traders.

As to the rest of the argument, it seems to be structured along these lines:

* More efficient markets with lower spreads between buy and sell are good. I think this is a valid claim, but I don't think it follows from the existence of high frequency trading, but rather from more efficient, automated trading systems.

* High frequency trading helps supply market liquidity, and this liquidity is good. I can buy the first part of this, and the second part seems mostly true.

* Old-fashioned purchasers seem to be annoyed that when they make a large purchase, the price for the last share is higher than the price for the first share, because the market has already reacted to the change in supply and demand. He also makes the argument that were this not so, the sellers of shares would in effect be subsidizing purchasers. His case seems solid enough to me.

* But he then makes another claim that seems to contradict it. He suggests that companies with stocks that have low volume turnover are unduly affected by small purchases, and since high frequency trading increases volume, the impact is reduced.

* Finally, it seems he would like to claim that because "our nation's equity markets are far fairer, more efficient, more liquid and have lower transaction costs for investors than ever before", high frequency trading should claim a substantial portion of the credit.

~~~
kscaldef
It actually seems to be more like a quadruple-negative. Let's try to simplify.

"No serious market observer disputes the claim that volatility would not be
higher without the liquidity provided by high frequency traders."

"[serious market observers believe] that volatility would not be higher
without the liquidity provided by high frequency traders."

"[serious market observers believe] that volatility would [be lower] without
the liquidity provided by high frequency traders."

"[serious market observers believe] that volatility would [be lower] without
... high frequency traders."

"[serious market observers believe] that volatility [is higher with] ... high
frequency traders."

"[high frequency traders increase volatility]"

This, of course, is exactly the opposite of what the author proceeds to argue
in the following paragraphs. My conclusion is that the author managed to
create a sentence so overly complicated that even he could not understand what
he was saying.

------
youngian
I usually hate TL;DR comments, but if someone provided a short summary of the
argument here (and for bonus points, a critique of the argument's strength), I
would be very grateful.

~~~
sparky
The argument is essentially: 1) High-frequency traders (HFTs) increase
liquidity. For the benefit of those who don't know what that means: there are
actually a finite amount of shares of each company, and you cannot buy shares
unless someone is willing to sell theirs to you, and you cannot sell shares
unless someone is willing to buy them from you. You can imagine that you might
not be able to sell your shares the instant you want them to if humans are in
the loop on the buyer side (i.e., if a human has to review your selling price
and decide whether or not to buy), and vice-versa. In contrast, if somebody
has programmed a computer to automatically execute trades if certain
conditions are met, you can buy and sell shares very quickly. This is what
HFTs do.

2) HFTs provide transparent price discovery. This means that the computer
programs the HFTs have set up will quickly and unambiguously tell you at what
price they are willing to buy and sell shares. Contrast this with a
hypothetical process in which you had to haggle with human representatives of
each shareholder or potential buyer in order to figure out the price. It's
similar to consumer vs. enterprise software sales (sticker price vs. "well,
how much can you afford?"). In theory, transparent price discovery promotes
fairness (everyone sees the same price) and encourages trading due to
decreased latency and hassle.

3) Lots of repetition of 1 and 2. Also an assertion that HFT decreases
volatility (average dPrice/dt), while most commentary on the matter assumes
that it would increase volatility, due to algorithms that are either busted (
e.g., [http://arstechnica.com/business/news/2010/01/how-a-stray-
mou...](http://arstechnica.com/business/news/2010/01/how-a-stray-mouse-click-
choked-the-nyse-cost-a-bank-150k.ars)) or interacting with one another in a
bad way. It is disconcerting to me that the author cites empirical evidence
without a hint of intuition or insight to help the reader generalize it;
however, it is difficult to dismiss the evidence off-hand without looking at
it more closely and/or being more expert than I in the matter.

Points 1 and 2 are by far the most common and obvious arguments for HFT, and
the analysis in TFA is not bad, but not exemplary either. The rest of the
article is basically redundant and comes off a little defensive. I found this
article interesting ( <http://www.zerohedge.com/article/whoa-glitch-hft> ),
though its tone is also less-than-objective.

~~~
_delirium
The rest of the article seems to make some rather dubious strong claims, also.
For example: "High frequency traders can only trade profitably when their
trades push a stock price towards fair value."

I don't see why there's any particular reason that's true. High-frequency
traders can trade profitably whenever their trades are in line with (very)
short-term price movements. Ideally everything works together to push prices
towards fair value, but you can't assume that as an axiom, since that's the
main point being disputed in that section (the one on volatility).

~~~
Rimpinths
One other aspect of HFT that was not mentioned in the article is that HFTers
often seek arbitrage opportunities. For example, the value of many ETFs such
as SPY (i.e. an ETF tracking the S&P 500) are derived from the value of
underlying securities. If the value of SPY versus the value of the underlying
securities becomes out of sync, HFTers may go long one and short the other and
then profit when they converge again. In this sense, HFTers only profit if the
market returns to fair value. This applies to many ETFs, convertible
securities, and options.

