There's no counter argument here nor does this come across as informed or educated. All you've done is talk about the process with as many technical words as you could without actually saying why 15ms liquidity gives us anything.
Apart from mini-crashes. And massive profits for companies that create nothing and actually were the cause of the recent financial meltdown.
Which is why many of us sit here scratching our heads or make sarcastic comments like the op.
I read his comment without any trouble. I don't work in finance but I'm perhaps a little more familiar with it than the typical HN reader. It certainly didn't come across as an attempt to snow the thread with jargon.
A careful reread generates this list of domain-specific terms:
Most of these mean what they sound like they mean. If "liquidity" is complicated, it's also the topic of the whole thread. "Passive trading" is probably the closest thing to jargon in the whole comment.
It would be better if nobody made sarcastic comments, wouldn't it?
The Flash Crash was caused by the NYSE's faulty time-stamping system. It essentially broadcast false information that caused traders to think there was an arbitrage opportunity. This was entirely the NYSE's fault. See here for details: http://www.nanex.net/20100506/FlashCrashAnalysis_Part3-1.htm...
> And massive profits for companies that create nothing
They prevent you from paying even more to corrupt exchange specialists. This creates billions of dollars a year in value. They also have a neat ability to help the market recover from irrational crashes in 20 minutes, instead of lingering there for days or months while everyone is too scared to provide liquidity.
> and actually were the cause of the recent financial meltdown.
HFT is completely unrelated to the financial meltdown. The financial meltdown was caused by a housing bubble. HFT market makers don't even trade mortgage-backed securities. Those were traded over-the-counter (basically via phone calls) by investment banks.
If you don't know what these words mean, then look them up instead of complaining about it. If you want to make a point, it is your obligation to understand the subject matter. Don't argue about things you don't understand.
Apart from mini-crashes. And massive profits for companies that create nothing and actually were the cause of the recent financial meltdown.
Could you explain how low latency trading caused either of these things?
I'm particularly curious what relation you see between low latency trading in various computerized exchanges, and a financial meltdown primarily involving OTC trading in heterogeneous derivative-like equities.
By the way, to answer the question, 15ms of liquidity is just as good as 100ms or 1 sec of liquidity. The ordinary trader doesn't care about latency, latency is purely a game between HFT's to see who will receive the profits from selling liquidity.
"By the way, to answer the question, 15ms of liquidity is just as good as 100ms or 1 sec of liquidity. The ordinary trader doesn't care about latency, latency is purely a game between HFT's to see who will receive the profits from selling liquidity."
I think this is the crux of why people think HFT is a net harm to the economy. They're devoting many millions or maybe billions of dollars to this stuff, and presumably making a hefty profit for it to be worth it, and it actually makes zero useful impact on the market? Yeah, that pisses me off.
I have no problem with the financial sector being overpaid if they actually provide value to the economy. Capital allocation is a necessity and nobody's claiming that soviet-style planning would be superior. But HFT looks to me like they're just sucking little pieces out of everyone else's trades, while providing no value to society.
Without getting into whether we're paying too much of a premium to the financial industry to make the economy more efficient (for instance, by enabling you to get a 15 year mortgage on a house with 20% down instead of a 5-year mortgage with a balloon payment):
HFT makes a profit off the trading spread. The spread is "friction" in the market. It's the gap between what one person wants to spend and another wants to take in for the same good. Every time you make a trade, you cross the spread and thus pay a fee; you're "buying liquidity".
HFTs compete with everyone else trying to make a profit from the spread. The people being harmed most directly by HFTs are themselves trying to extract a fee from normal market participants. Moreover, by competing very effectively, the HFTs are narrowing the spread. They are effectively bidding the price of liquidity down.
It would make sense to be mad at HFTs if the participants they were replacing were mom's and pop's just trying to make a reasonable living while looking out for the good of the whole market. But that's not who HFTs are displacing. The human traders who profited from spreads in the 1980s were often crooked as a carton full of fish hooks. The markets before automation (and the OTC markets today) are riven with people running strategies to skim money off real buyers and sellers.
The more you know about how the markets work and what the incentives of all the players are, the harder it becomes to feel any outrage about HFT.
Yeah, but you'll notice the quote at the top of my post was basically saying that that friction doesn't matter at small enough intervals.
I get that you don't want too much friction in the market, you definitely don't want excessive surpluses or shortages of actual goods and to some extent that applies to securities.
But I see zero reason to care about the price of IBM in even a 1-minute interval. A little friction? Who cares, we're not impeding shipments of goods here, and even if we were, the 1-minute spread on a 6 month lumber future is similarly unimportant, to me at least. That's without even getting into seconds and milliseconds.
Basically, I'm saying that "but, liquidity!" gets less and less convincing as an argument as the time intervals shrink. At a certain point, we're just funding a very expensive and stupid zero-sum game with pennies out of all of our 401k accounts.
Doesn't it make more sense to make a firm argument for "why not liquidity"?
Who exactly is funding this expensive and stupid zero-sum game? Exactly what effect does this game have on your 401k? Isn't your 401k invested in index funds? Don't they trade infrequently and in huge, huge blocks? A no-load S&P 500 tracking fund is not HFT'ing the components of the S&P 500.
Doesn't it make more sense to make a firm argument for "why not liquidity"?
Sure. Why not strip clubs? And blackjack? I acknowledged that liquidity has value it's not an end -- it only has value in as much as it provides value.
I don't fully understand who's funding it, but I know the money comes from trade volume, and a big chunk if not the majority of the money on the market is there from institutional funds, 401ks, pensions, etc. Those that are actively managed get nibbled away at. Those that hold for longer (index funds do rebalance) get nibbled away at less frequently.
What's your hypothesis for where the trade volume that they make money from originates? They're just taking money from the rest of the financial industry?
I don't know where to start. I'm not saying you're wrong, just, I don't know where to start responding. And please feel free to mentally append "as I understand it" to each of these.
1. Funds of actively traded securities are nibbling away at you with or without HFTs. Actively traded funds are evil.
2. HFT market makers aren't nibbling at actively-traded funds. They're nibbling at other market makers. Like I said previously: an HFT market maker is bidding the price of liquidity down, not up.
3. Your 401k is almost certainly not invested in a fund whose strategy is passive trading and selling liquidity. Your funds have positions in the market. Passive traders do not take positions. Your 401k benefits (very marginally) from the tightened spreads created by HFTs. The people who don't benefit are day traders.
4. I have no idea what "strip clubs" and "blackjack" have to do with any of this.
Actively traded funds are not "evil." Actively traded funds are the only reason you can buy an index fund and actually expect a decent return. Without active traders, the market would be inefficient, i.e. things would not be fairly priced.
"We" aren't funding anything. We (401k owners) benefit minutely from the reduced friction, but it doesn't cost us anything; if hedge fund A gets their latency down to 1ms and so they get our buy/sell rather than hedge fund B that's running at 5ms, so what? It's not like A charges us any more than B did, and why should I care whether A or B gets the profit?
What's happening is commoditization, which you should be happy about - the only value the HFTs are destroying is their own profits. It's just like if PC maker A can sell hard drives 5 cents cheaper than PC maker B by building a faster robot - sure, I didn't really care whether my hard drive was $120 or $120.05, but I don't lose anything - why do I care whether A or B gets the profit?
"But HFT looks to me like they're just sucking little pieces out of everyone else's trades, while providing no value to society."
This suggests that market participants of any type provide "value to society". Their is only one reason any entity participates in the market, and it has nothing to do altruism, and everything to do with making money for themselves or their clients. Capitol allocation to companies going public is over once the shares are issued via the IPO auction. No transaction on the secondary market results in any money going back to the company that issued the shares. So how does the length of time a firm holds onto a stock before attempting to realize profits define whether or not they provide value?
He's not imputing a direct connection between HFT and the derivatives meltdown. He's implying guilt by association, since HFT systems were deployed by the big investment banks. Of course, so was Powerpoint, which itself probably played a bigger role in the meltdown, so maybe we should ban that too.
For mini crashes, I think an argument can be made about HFT potentially making the stock prices, etc… less normal and more fat-tailed, and thus less well handled by statistical models (e.g. http://www.bankofengland.co.uk/publications/Documents/speech...). Quantifying how much, of course, is another matter.
The financial meltdown was just caused by a deviation slightly larger than the one regulators had accounted for.
Regulators were trying to juggle lots of different policies... relaxing underwriting and reserve capital requirements while pumping up mortgages to help make joe sixpack feel rich so he'd support the war on terror. Such widespread regulatory corruption is unprecedented in the first world.
It is/was a horrible mess, but HFT has nothing to do with it. The bizarre indignation people feel about HFT shows just how gullible people can be to "news" stories.
Apart from mini-crashes. And massive profits for companies that create nothing and actually were the cause of the recent financial meltdown.
Which is why many of us sit here scratching our heads or make sarcastic comments like the op.