He’s referring to the fact that the HFT “provides liquidity” as in getting a share off your hands and flipping it to someone else that is not you a moment later. This way you didn’t have to wait 3 seconds or 1 minute or whatever to sell your shares because someone knew they could flip them (alpha) on a short notice so they participated in a transaction with you. He’s assuming that without the HFT, the transactions wouldn’t be as frequent and you’d have to either a) wait for the fill on your trade , or b) lower your ask price if selling under time deadline. Analogously for buy orders.
The only parties with semi-global visibility are prime brokers by definition; they see every position of everyone who custodies with them.
The parties with global visibility of the US market are TRF (trade reporting facility) and those are the only parties who can sort of evaluate the HFT claims without bias or vested interest. Most of the studies in the field have some sort of an angle or vested interest so it’s hard to evaluate the veracity of the claims one way or another.
A counterpoint to HFT is that stock markets existed before the the advent of computers and they had runs, panics and blow ups just like regular markets do now.
I don’t have time to reply properly until a few hours from now.
In the meantime what I can say very simply in the hope that someone else knowledgeable can contribute earlier.
It’s simply an empirical fact that the costs of intermediation to the system are the lowest they have ever been. The US and other global electronic markets are incredibly efficient and deliver unmatched liquidity, information efficiency, and the lowest costs to the entire capital markets than at anytime in history. That march forward is continuous and brutally competitive
There are many many way to see this and measure it, any serious quantitative analysis, by professionals, for instance trained in econometrics and with access to the raw data, like those at say the Fed, or those operating exchanges, as examples.
Your dismissals seem to be very biased and you’re not allowing the possibility of being wrong.
As a practitioner who worked on the systems you’re citing I can tell you’re wrong on many fronts.
As far as costs are concerned, you’re not answering the most relevant question that applies to most users of this forum: costs to retail traders, and are only tackling the institutional side of things. Nobody from retail concerns themselves with costs of intermediation because those costs are irrelevant to retail. Not at the order volumes that don’t even incur slippage.
Plus, fees are only part of the game. I can give you an NBBO improvement now to be compliant with the regulation, but I am not guaranteeing anything in terms of price in the next second. See where this is going?
Edit: by the way, what you’re repeating is what I jokingly call a “party line”. Especially if you look at the hard cold data. For example people often cite narrower spreads etc. but even with Interactive Brokers you can get MPID displayed on the NMS aggregated full depth order book and see who quotes how much and at what levels and the spreads don’t add up to the half of the myths people keep repeating. It’s easy to hide the real numbers in the _averages_ and various other statistics though.
I’m a practitioner and no, the costs to retail traders is included and analyzed.
The most vocal critics of HFT are very often previously practitioners who are upset when their strategies and models becomes obsolete are are outwitted by even more efficient operators.
Give any example of where you are going?
I will say RegNMS and NBBO regulations are actually preventing even further efficiencies. Dark pools and off exchange matching or internalization are complex topic that are easy to misunderstand. There are absolutely bad actors to be found in the system. This is true in any system. But on aggregate the system is continuously reducing costs and improving efficiency.
Intermediation costs are a friction on the real economy and capital markets and they will always exist, but on aggregate they are dropping for all users, institutional and retail.
In regards to party line, it’s absurd, you can simply take the aggregate income, not profits, of all the top HFT operators, their income is their counterparties costs, and when attributed per market, this number is continuously dropping on aggregate. If you look at an individual firm, you can see it’s income growing, however that will come from 2 dimensions, either expanding their operations to other markets, or taking share from a competitor. However if you sum all profits across all HFT operators on a single market complex, say US equities, on longer economic timescales, this number is continuously dropping. Obviously during periods of market volatility this number can increase, but the trend over years, will be always downward.
HFT is a absolutely brutally competitive industry.
I’d be interested in what you saw working on such systems seem “wrong” or “unfair”. My guess is you don’t understand that all is fair in war and that includes HFT, as long as it is legal.
By the way, your description of profits dropping for market participants reminds of the concept you may find interesting.
Here’s an example of P&L dynamics:
At time t, your throw an unbiased coin. If it comes out heads your wealth multiplies by 0.6 with probability 0.5, or if it comes up tails, your wealth multiplies by 1.5 with probability 0.5.
Now you could simulate this process and take two averages. One is an ensemble average, averaging over many trajectories (of many participants) at a pre-defined time step t.
The other average is a time average (what happens to a a single trajectory picked at random over time). You may find the result interesting and close to what you’ve just described. This result is because of the process being non-ergodic; but it exhibits a few “winner takes all” and has nothing to do with the properties of the winners. It is a purely random property. An illuminating exercise. There are quite a few other results like this one from the field of stochastic processes that relate volatility bounds to your expected P&L, etc.
I am not disagreeing with you that the costs are dropping and that participants benefit from that. In fact I agree. Your projection that I find the field unfair is also unfounded. I love the field and find it immensely interesting. I just don’t take mythology surrounding it at face value because I often found it to be a) outdated b) full of mythology but no hard data.
What I am saying is that the thesis that the costs are dropping due to HFT style strategies has not been proven. Majority of the HFT tend to be market makers which tend to help with liquidity but not all are. I agree that liquidity helps offload or acquire large stakes.
As for NBBO and the effect a regulation has on markets you seem to be extremely US centric but if you go across the ocean and find out that Europe has no concept of NBBO at all, and that a retail person trading experience is equivalent for getting a different price on Amazon depending on which web browser they use you could imagine how that would make an average retail person feel.
Another example of the regulation is trying to move a large stake outside regular hours when NMS is suspended. Why do you think OTC block trades are pre-arranged at a fixed price? You can even look them up in relevant reporting facilities.
As for dark pools, ATS and internalizers there’s nothing difficult about them. I don’t think you’re doing anyone any favors by obfuscating an extremely simple concepts. Those market participants with their specific mechanics that are learnable. What’s complex is how to devise strategies and how to rely on the liquidity sources to get your desired fills and desired rates. You’re describing bread and butter of trading at an institutional level and the fact it seems difficult can maybe be attributed to the fact that it is opaque, doesn’t enjoy public communities, e.g. very little blog posts exist on the subject and the knowledge is sort of centralized to a specialized corners of the industry. But it is learnable without great difficulty if you have access to the resources.
What’s surprising to me is that a lot of people can talk about abstract concepts in computer science and then don’t connect facts that bridge into a separate discipline. As an example I could refer to consistency that people love to rave about but somehow forget the concept the moment capital market is introduced.
And yes, I’m familiar with the no trade theorem and relevant academic concepts but they are all models that often don’t translate to real life due to extremely limiting assumptions that don’t enjoy any connection to reality. I think it’s a problem with the community in this particular industry to take academic market models at face value. Often you will find that looking at a model carefully with assumptions that mirror real world, your performance gets better.
It’s true I’m US centric. What I do know about European equities market structure actually points to one specific problem that actually we also have some of in the US. I’d suggest you look at clearing house collateral regulations, especially around ETF transactions, creation and redemption, and posting of OTC positions. That part of the system, which btw isn’t HFT, is very very shady.
I agree it’s all quite understandable if people had the resources available. I would argue part of the reason it is opaque is the fears of operators that too much public attention can bring a lynch mob. This business can literally be one of the most profitable activities on the planet, but contrary to populist sentiment this is not evidence of wrong doing, it’s simply because it’s so automated and scalable and all electronic.
Back to ATS and dark liquidity, this isn’t as trivial to explain as you suggest, it requires understanding of flow toxicity and information theory to be understood completely. You must know that in markets, transactions can be beneficial to both parties as they have different objective functions and timescales.
What evidence can be presented that supports the idea HFT operators are extracting increasing costs on the system? I’m not aware of any.
Yes, toxic flows and adverse selection are the magical buzzwords that get thrown around a lot. I’m familiar with glosten-milgrom model and private information and all related paradoxes.
What you’re failing to disclose is that there is an easy way out of solving the adverse selection problem. For example you could buy “uninformed flow”. I think that you could agree that for the touted sophistication of the field you would expect something … more sophisticated?
Again, don’t get me wrong. I love the field but I think it’s stagnant in certain aspects and I like to have a sober view of it.
EDIT: As a thought experiment, envision a setup where the trading strategies compete on the basis of the strategy itself, with a single global market with a single API that takes bids and offers in rounds and anyone who wants to is allowed to participate for free with no fees whatsoever. For the sake of example, suppose it’s a government owned and operated project just like the GPS (for which you don’t have to pay a subscription) in your phone. No market access fees, no market data fees, no preferential latency treatment. A perfect coding competition playground.
How many current market participants do you think would survive in such an environment and if your answer is different than the current number, why?
While I fully believe you are an experienced practitioner however I feel your thought experiment actually shows you don’t understand the underlying nature of capital markets in capitalism, the relationship between risk and liquidity, and the fractal nature of timescales of participants. I’m fortunate enough to have both a background in HFT but prior to that a background in many other aspects of capital markets and the broader financial system, which gives be a better perspective than the typical HFT strategist or engineer.
It’s too late in the day for me today to attempt to write a coherent and accurate explanation of exactly why I say that. However I will say you don’t understand this isn’t a zero sum game and it’s an incorrect argument to claim HFT is an arms race in a game like a war, which is a negative sum game.
You start sounding a bit like chatgpt with the “it is I who have the sole power of understanding” and self contradicting arguments. I never mentioned zero sum games or anything of the sort. Please don’t ascribe your thoughts to mine. I did helpfully screenshot your comment invoking war and claiming HFT is like it. I can jog your memory if you’d like. Now you’re claiming the opposite. Your arguments start becoming internally inconsistent.
Your risk argument doesn’t hold water because liquidity is not the only risk. There are at least 20+ I can think of from the top of my head without even trying.
HFT is war but the system as a whole isn’t. My impression of our interactions on HN is you have a valuable insight that perhaps I can even agree with. However unfortunately I don’t know what it is yet as you haven’t explained properly what your hypothesis of negative effects or externalities HFT operators have.
HN isn’t the best forum for this type of ongoing discussion. Engage me on reddit if you like. u/alchemist1e9
The only parties with semi-global visibility are prime brokers by definition; they see every position of everyone who custodies with them.
The parties with global visibility of the US market are TRF (trade reporting facility) and those are the only parties who can sort of evaluate the HFT claims without bias or vested interest. Most of the studies in the field have some sort of an angle or vested interest so it’s hard to evaluate the veracity of the claims one way or another.
A counterpoint to HFT is that stock markets existed before the the advent of computers and they had runs, panics and blow ups just like regular markets do now.