Something this article ignores, and which is ignored by most articles on HFT, is that the process is ilegible to the public. "No no we're doing you a favor!" is not reassuring when the activity consumes a bunch of resources on zero sum activity.
Ultimately investing runs on trust. HFT is consuming public trust in the financial system at a prodigious rate. Is it a trillion dollars a year? A billion? Hard to be sure. But it certainly isn't clear the tiny market-making improvements are worth it.
> when the activity consumes a bunch of resources on zero sum activity
The thing to remember about the markets is that each individual trade is always zero sum, but the value of the markets comes from the aggregate total.
The behaviors that we want in our markets, price discovery, liquidity, easy risk management are all outcomes that are enabled by speculative market participants like market makers engaging in lots of zero sum activity.
So instead of decrying the zero sum activity what we want to do is drive down the price of it to the non zero sum participants. And HFT market making has been prodigiously good at that.
No one wants actual stock. They want to gain money on price differences in stock, or get the dividends that owning stock gives rights to, or I suppose they want to be able to have the voting rights stocks grant.
The difference is all about timing. I may want something else more than you do but am willing to sell now. If at the time you close out your trade (that is sell the shares from me) the price may have risen or fallen. If it rose you won and I lost by not holding longer.
This time mitigation is precisely what market makers have always done and what HFT market makers have driven the profits (and thus the costs to outside participants) out of.
Buying stock is trading future money than money today which is a real and meaningful trade. On the other side, I might want a new car, which means I want money, which means I want to sell stock.
Even stock to stock transitions can be meaningful as Bill Gates had a lot of MS stock and wanted a hedge so he sold stock. What he got was probably worth 'less' the diversification was valuable to him making the transaction a net positive.
What you are talking about are precisely the aggregate benefits to the markets I mentioned, liquidity and easy risk management.
That the markets provide those behaviors is what makes them valuable but the actual trades that make up those aggregates, your selling of shares when you need a car to someone else is zero sum. Either you would make more by holding or you wouldn't.
That something other than that is more important to you indicates that you are in the market for a middle man to bridge that time gap and buy some of the risk from you. Your time horizon is from share purchase to "need money for car", not from share purchase to "optimal selling point". The service you take advantage of when you bridge that gap is provided by the aggregate work of many zero sum interactions between speculative participants like market makers and "investors" like your self.
If I put a sell order on the market at 12:00 the only impact is the sales price. If it executes at 1PM or 2PM it makes zero difference to me as I can only access money at the end of the day. So, I only gain liquidity if I would have been otherwise unable to sell by the end of the day. Therefore, I don't gain liquidity from HFT.
But people don't care about value per se, they care about the extra value they get (over the price they're paying). Therefore, stock is only valuable inasmuch as what you pay for it is less than the present value of future dividends. Otherwise you're overpaying for it, and you might just as well keep the money.
No, stock markets do not perform the same function as grocery stores. Grocery stores take on inventory risk by purchasing (in bulk) the goods that they think they can sell. If their inventory goes unsold or spoils, they lose. Stock markets provide a _venue_ for trading, but it is the market maker which takes on the inventory risk. An appropriate analogy would be that the grocery store is renting from a separate property owner. The property owner collects rent from the grocery store, just as stock markets collect "rent" (trading fees, colocation fees, system access fees) from market makers. In both cases, the inventory risk is managed by the middleman (grocery store, market maker).
That's a pretty weird example, because that is the _only_ stock that trades at $200,000/share. Such a high price forces away liquidity intentionally, because the capital requirements of even 1 share are larger than most futures contracts. For most individuals it is more like buying a house than a stock! As a result, there is a NYSE employee (I forget the title, maybe DMM?) on the floor which _manually_ matches buyers against sellers. Other exchanges I believe still match electronically.
Aside from that, how does your statement relate to inventory risk? Market makers and grocery stores take on inventory risk. An absence of market makers in BRK.A* would only show that nobody wants to take on that risk. It does not change the role of the exchange. Exchanges facilitate matches, they are not a counterparty.
Yes, and in order the markets to perform this function they needs lots of active participants with differing investing time horizons. Without market makers markets tend to be very inefficient at their job.
Haha! :) Clever point but grocery stores provide utility. HFT is more like if you set out to go buy a whole lot of peppers (because you have a pepper index fund :) and some guy saw you doing this at the first store... knew that was your plan, called all around town placing orders to buy all the other peppers in town and offered to sell them to you for a premium, but cancelled those orders if you declined.
You're confusing the order of operations for this pepper middle man. He can't place an order for peppers contingent on me buying them. He has to buy them or not. Ignoring this key difference fundamentally misrepresents the risk he is taking and the utility (price discovery) he is providing to the market.
It's flawed analogies either way, but a better analogy would be you are a store owner with many branches. The worlds largest pepper buyer walks into your store and buys your entire supply. You call your other branches and tell them to change the price on your own inventory because you are assuming that the worlds largest pepper buyer doesnt need just one stores worth of peppers.
>The behaviors that we want in our markets, price discovery, liquidity, easy risk management
None of which we get from HFT.
HFT cannibalizes the research done by value investors (oh, but it's not legally front running if they're not your customer!), rendering that a market for lemons, so there goes price discovery.
HFT floods the market with more liquidity than it needs during normal periods (there is no benefit to you being able to trade at split second intervals. nada. none) and then extracts it all during periods of market distress when liquidity would acually be useful.
And risk management? Please. They're only managing their own risks.
No but we do get it from market makers. HFT has led to a dramatic decrease in the price of market making. Unless your claim is that market making is not something that should be allowed?
> And risk management? Please. They're only managing their own risks.
My point about risk management was about the aggregate benefits of the markets, not about HFT providing someone risk management. If you have some risk that you want to sell, there will be a buyer for it because of the aggregate sum total of all the zero sum transactions available in the markets.
It's directly causal, algo's fighting for better position directly decrease the spread. Competition has the effect of removing unnecessary markup as the next guy who sells just a bit cheaper or offers just a bit more wins until the price is as close as possible to barely profitable. Humans are too slow to play such a tight game, computers aren't.
By a factor of 25, and it's only not more because there's a law against making them any smaller. And it's very much because of computerization; whether you consider it to be HFT is a question of whether you count the early days when computerized firms competed on price or the later ones when the aforementioned law meant they could only compete on latency.
You are ignoring the context of the article in order to push an ideological point.
Levine is explaining how you can get a 95+% cancellation rate simply by running the most brain-dead simple possible market maker strategy: because you're required to post orders at multiple exchanges, and because every price change involves order cancellations (potentially lots of order cancellations, even on a single exchange, because of pairs trading and price ladders), and because adjusting prices on exchanges in near-real-time is the basic job of a market maker, virtually anyone running an electronic market maker is going to have a huge cancellation rate.
Levine brings this up to illustrate the silliness of proposals to regulate HFT by targeting entities with huge cancellation rates.
Comes now 'cdroconnor. You're playing a semantic game. You're defining "HFT" as "bad HFT", and everything else as simple "electronic trading". FINE. Nobody disagrees with you, except on the very boring point of what labels to attach to things.
But your argument here doesn't make any sense for the thread, because the good simple electronic trading you're condoning is also targeted by the cancellation regulation Clinton proposed. Which is the whole point of the article.
The discussion went off course way before I dived in.
>Comes now 'cdroconnor. You're playing a semantic game. You're defining "HFT" as "bad HFT", and everything else as simple "electronic trading". FINE. Nobody disagrees with you, except on the very boring point of what labels to attach to things.
There is a very substantial non-semantic difference between robot-executed sub-millisecond trades (HFT) and trades which are are just executed electronically.
In every discussion about HFT the probability of someone falsely attributing the decreased transaction costs of "not shouting in a pit" to algorithms that execute sub-millisecond transactions approaches 1.
>But your argument here doesn't make any sense for the thread, because the good simple electronic trading you're condoning is also targeted by the cancellation regulation Clinton proposed
I'm no particular fan of that either. I'd prefer Italian style micro-transaction tax. That wipes out nearly all of the sub-millisecond trading and leaves the rest intact, including market making.
You've made it very clear how important it is to you that we call benign electronic trading --- and, I infer, electronic market making --- something other than "HFT".
What you haven't made clear is why you believe you're actually arguing with anyone here. I am 100% certain, because I've had the conversation with him multiple times, that 'kasey_junk agrees with you that there is such a thing as malignant electronic trading.
Exactly what is the controversy here? The people who are talking about HFT reducing spreads are talking about benign electronic trading, and none of them appear to be denying that there are other kinds of electronic trading.
>What you haven't made clear is why you believe you're actually arguing with anyone here. I am 100% certain, because I've had the conversation with him multiple times, that 'kasey_junk agrees with you that there is such a thing as malignant electronic trading.
I was arguing that sub-second algorithmic trading cannot be credited with substantially reducing spreads in the early 00s.
kasey_junk linked to an article that claimed that.
It's a defense of HFT that's rolled out so often that it's practically become a cliche.
Lots of things are illegible to the public. Explain to me all the processes involved in building the smart phone in your pocket. You can't. I can't. Probably no single person in the world can. Who cares?
Doesn't it? The illegibility of offshore money affecting overall tax take and therefore government spending, services, and jobs? The illegibility of jobs disappearing to ... somewhere? Not knowing if you've bought products that have been manufactured by slave labour or just awful working conditions?
No-one is being made worse-off by HFT except professional market-makers (who are being outcompeted) and perhaps professional buy-side traders (whose secrets leak out faster), both of whose job it is to understand the market. If you're a nonprofessional you should be investing with Vanguard or the like, and you benefit from HFT. If a layman with no expertise tries day-trading they're going to lose their money either way; we do have "must have this much money to be allowed to trade" laws, but those are controversial too for obvious reasons.
Read your link. Dark pools are created so institutions can trade large blocks without moving the price, or to hide transactions.
Dark pools are beneficial to institutions in some circumstances, not to individuals.
And yes HFT hasn't always existed, once upon a time you'd have a pit of screaming traders and brokers, and for an individual to buy/sell stocks you'd have to call your broker on the phone, who'd charge you an obscene amount for the privilege.
Anyhow, HFT is more or less just a euphemism for high-speed arbitrage/market making.
I look at the execution I get on my trades today, I couldn't imagine not having that service available.
Yes and the bit about 'predatory HFT' is backed up with an article which has no information about what constitutes 'predatory HFT', it merely repeats the words in a small annotion. The article is more about the regulatory concerns over dark pools.
I'll tell you why they use dark pools. On the open market, if you sell lots of shares, buyers will see that, and drop their bids. Likewise if you put in a large bid, sellers will raise their asks. In a dark pool, institutions can move large blocks at a given price without market forces interfering, and reduce trading costs.
Dark pools exist largely to prevent HFT from parasitically extracting value from large trades. Spearing whales I believe it's called. Giant investment banks, hedge funds, insurance companies and pension funds use them.
>That if we didn't have HFT, we wouldn't need them? That's an argument for HFT, not against.
Dark pools are an evolved defense against parasitic market players that is not cheap. These costs are then passed on to you via your pension fund, index fund or if you buy insurance.
I don't see how that's an argument for them unless you or your friends were personally profiting from it.
You and I buy stocks in small amounts. Intuitively, after each of our trades, we understand that the market moves to take the impact of those trades into account. That's the point of markets!
So why on earth should it be that a hedge fund should be able to buy or sell huge amounts of stock without having the market move? You don't have that power. Why do they? The fact that a giant entity is trying to move huge amounts of stock is information. The point of the market is to capture that information and build it into prices. That's exactly what HFTs are doing in this scenario.
The expectation that hedge fund managers have that they should be able to capture the spot price of a security and then buy or sell arbitrary amounts at that price, taking their information advantage out of the hides of every other market participant, seems totally unfair. Again: you don't have that privilege on the market. Why do they?
You keep saying "shout in a pit" as if that was the primary benefit of electronic trading. But of course, that's not the primary benefit. The major benefit is that with humans out of the loop, it's harder to grift huge amounts of money from people trying to do simple trades.
For instance: Google [odd eighths scandal].
And that's a modern example of humans rigging the markets, exploiting lack of competition and automation. Things get much worse the further back you go in time.
Much more often than you might think. Every time we make a deposit (likely monthly/bi/weekly) that money needs to be deployed (aka stock purchased). If we are part of a big fund that fund may need to buy stocks in huge chunks and when the HFT sniffs out what they are buying they will raise the price.
The price has to go up anyway, that's what happens when demand increases, it's nothing to do with HFT. Large block trades like this will often be arrange over the counter (OTC) or on dark pools, so the fund purchasing the shares will get a fixed price and it's up to the market maker to deal with the execution risk in the open market.
> Lots of things are illegible to the public. Explain to me all the processes involved in building the smart phone in your pocket. You can't. I can't. Probably no single person in the world can. Who cares?
That's not true, not like HFT anyway.
First, you can quickly and succinctly describe the traits and benefits of a smartphone. You can be high-level at first, you don't have to explain how every detail works. There's no question, for example, that a touch screen doesn't actually work as advertised. You can just say that a smartphone is a cellular/wireless computer device with a usefully large touch-screen display.
In contrast, the unknown question with High-Frequency Trading is: is it actually providing value to anyone but the traders themselves? They might say they are "market-making" but are they really market-making (a trading role with proven market value) or are they merely exploiting structural inefficiencies in the trading infrastructure that mostly hurt everybody else? Maybe they are, but they should be able to describe it in a high level terms first (market-making, liquidity, etc.) where their role provides an obvious benefit to the market, and if you don't understand the high-level terms (eg liquidity) you can look them up.
So far as I can tell (and I am willing to be proved wrong here) there is no consensus answer to the question of whether HFT is actually valuable to markets.
That's not what High-Frequency Trading means. The terms for what what you describe are the more general "electronic trading" and "automated trading". They enable HFT, but are not HFT.
High-Frequency Trading, while also an umbrella term, virtually always refers to a subset of algorithmic trading involving arbitrage over extremely short timeframes. HFT is not about being faster than "slow expensive humans" it's about being microseconds faster than other HFTs.
The distinction I am making means everything. It enables "Latency Arbitrage." It allows HF traders to see trades that are about to happen before they actually happen and cut in front if it'll be profitable.
That blog post does not accurately represent how markets work. It is not possible to see trades that are about to happen that have not happened yet just by being faster. You can react to past trades faster than someone else. But no matter how fast you react, it doesn't mean you can see the future.
We're getting off track. The point is that the value of HFT is disputed. You claimed HFT reduced buy/sell spreads by a factor of 10, which is obviously false once one distinguishes HFT and Electronic Trading in general. If you're unwilling to do anything but deny the difference between HFT and Electronic Trading there's no point in having a discussion about HFT's benefits.
For the record, I think the vast majority of people's arguments about HFT are simply about the definitions of what HFT is. It isn't clearly defined anywhere and the blog post you linked earlier certainly doesn't capture any definition I've seen used in the industry.
In my experience though, electronic market making, which I regard as a very good thing, is a direct subset of HFT. To do it properly you must be fully automated, fast, across venue and trade alot. By nearly every definition I've seen that makes you HFT.
People seem to think that 'zero-sum' is an analytic shortcut to declaring something good/bad. You can't actually do this, however neat it seems. You have to consider all the difficult-to-quantify social impacts and intricacies too.
Almost every attempt to declare something zero sum will miss out relations, factors, dependencies and links because the model they pick is too simple. Hence the never-ending arguments about trying to define something ZS or not.
It's also worth noting that power projection is also different because of different balances of other interests. The kinds of things other countries want to do is different, and the lengths to which the US is willing to go to affect them is different. In my opinion, these factors might be just as great or greater than relative military superiority.
I felt like the author not only decried projects where the kids have access to parental help, but projects where the kids have access to good facilities. And motivation. I'm not sure what's left to measure if we attempted to remove support, facilities, and motivation.
The author seems to support the idea that schools should provide more support and facilities. That sounds good, but the outcome of some schools doing this (the infamous ones near New York, apparently) seems to be the focus of criticism. I'm left not understanding the thrust of the article.
I think what he's suggesting isn't that the logs don't line up, but that AT&T may be purposely switching the phone to use the data roaming opportunity. Even though carriers gouge each other horribly on roaming, the marginal profit may be even more to the consumer. If this is true, it would be a scandal.
My understanding is that early SOU papers weren't delivered as speeches, but were mostly technical reports intended for what today would be regarded as people like the OMB and similar congressional bodies.
More recently they're vehicles for delivering messages to the public.
I'm interested in reactions to this idea: a virtual "shadow Congress."
The plan would be to get broad participation in an unofficial election process which would elect representatives to "shadow Congress." They'd at least start out by addressing the same agenda as real Congress, and be forbidden from introducing new agenda. The idea would be to generate a template of what a broad-participation representative group of citizens would like to see happen from Congress.
The theory is that if this shadow Congress is representative enough, it becomes hard for real Congress to ignore. The compromises it comes up with are a template for real compromises. When the national media starts writing stories like "Why can't real Congress do what shadow Congress can?" or "Here is the Senator unilaterally blocking the rest of Congress from following the shadow Congress' lead on this issue." the idea will have worked.
I'm certainly no art high roller, but my understanding is that the art world has a long history of patrons like this, who have eclectic tastes, large networks of trusting collectors, and an eye for the new. Everyone hates them, until eventually they build the Guggenheim museum and then everyone thinks they were awesome.