The advantage high-frequency trading firms have over everyone else

the direct feeds from exchanges are available to everyone not just HFT firms, so this is a misleading headline

--That means there is a latency arb opportunity when a trade happens at one venue.

This is in fact the business proposition of a whole number of markets, vis-a-vis the HFT firms. If you didn't know this you might have wondered how on earth they get people to cross at midpoint.

> We just need to see the problem as "who can provide liquidity and stability to a market" rather than "who has an unfair advantage"

And essentially every single analysis of THAT problem says that HFTs consume liquidity in times of instability, and "provide" liquidity in times of stability.

As such, HFT destroys the value that people actually care about.

Anyway... no point in arguing about this; the sociopathic assholes who run HFT aren't going to stop, the exchanges aren't going to fire their best customers, and the regulators are all bought and paid for. The only good news about HFT, at all, is that because it's a completely commoditized playing field, their margins tend to get compressed over time, so at least they're screwing us slightly less every year.

One issue is that this will still require people to behave strategically, since the auction is a complex game when you take into account everyone's information.

In theory, continuous trading should be the simplest game, and let people focus on their individual information and liquidity needs. In practice it certainly induces strategic behavior, but it might still be the simplest system.

The real problem in my opinion is the active human trading that drives these markets. The only reason there is so much is that people irrationally invest with actively traded funds. In fact if people were perfectly rational there would probably be too little price discovery, as people world but market portfolios and any other trade would stand out as information based. But in practice we are way on the other side of the spectrum, with way more active trading than is socially optimal.

I think you're vastly underestimating how quickly markets change, how technically difficult it would be to provide breaking information fairly at the ten minute mark and how important liquidity is to the market. If we slowed trades down then the economy would be significantly less responsive and markets in other countries would have significant advantages.

Shorter answer: If I can gain a profit now instead of in 10 minutes I can reinvest just as quickly and the entire economy benefits. These small chunks add up.

It seems you may be working under an incorrect (though very common on HN) assumption. The capital allocation component of the markets is not done via the purchase of shares in a company (i.e. if you buy shares you aren't allocating capital to that company) but when you sell them. The cash that comes from that sale (and maybe from dividend payments in the interim) can be used to fund other ventures (such as your retirement).

The funding of new businesses for instance happens on private markets/deals (and commodities futures are even more obviously not about new ventures).

With that lens, its more obvious that there is no more morally superior to "invest on fundamentals" than it is to buy with a dartboard, what is at issue is being able to get cash out of ventures when you know longer want to be in them.

To that end we want a market that brings the most people together on prices they agree on, with the cheapest amount of transaction cost.

Batch auctions (what you are describing) make bridging the gap between buyer and seller more risky (and if you don't outline your tie breaker algorithm, may not even change the speed race) and do not solve the venue arbitrage component at all. This added risk for no gain adds to the transaction costs of the market making it less efficient.

There exist currently, many venues that support batch auctions and they have the reputation of being more gamed than continuous trading, because the complexity of the auction.

That's pretty close to a much better idea - trading through the day in blocks of one second. At a human-level scale, it makes basically zero difference whether a market is continuous or updates every second, but it completely removes latency arbitrage.

one big problem with batch auctions at any frequency is that there are many assets around the world and, if they are not synchronized precisely, there will be massive arbitrage opportunities as assets get mispriced relative to each other, so overall pricing would become a lot less eficient.

Sure: basically when large institutional investors go to sell shares they sell them in blocks. There are not a ton of people who can afford to buy these entire blocks, though they may want to buy some portion of them. HFTs add value by buying these large blocks, and then breaking them up and selling them in smaller chunks. This is called "market making." This added liquidity makes it far easier for both the institutional investor to sell their shares as well as for the final buyer to purchase them. So the value they provide is increased liquidity to the market.

Edit: Whoops, I'm incorrect. This is a description of market making in general, but not how HFTs do it (which have a variety of strategies). But the general premise is that the value provided is still increased liquidity. That being said, not all HFTs employ a market making strategy.

The argument that HFTs would likely make is that they improve the efficiency of the marketplace, making for smaller spreads and for more liquidity, making it easier for all trades. The counter to both is that HFTs tend to disappear when market stress occurs, thus they fail to provide liquidity when the market needs it the most. I have no dog in the fight - HFTs do seem to have helped lower the cost of trading (along with the internet in general).

Whether or not we consider what the article describes as "frontrunning" - I'm not sure. Surely all these firms have bought access to the same Nasdaq direct feed, and have co-located their boxes as close to the Nasdaq servers as possible. I'm guessing the buy side and the sell side are both doing this at this point - either directly or through 3rd parties. My point is that yes, the advantage exists - but is probably getting reduced by the day. Is the retail trader going on SIP getting prayed upon? Probably, but retail traders also make up a small portion of total trades. That's not to say it isn't a problem - but they aren't the major market participants. Mutual funds are probably the biggest losers here - and they are, in turn, owned by individual investors. So there's an argument there that they are hurting individual investors that way.

To me the real question the idea that these firms are essentially riskless. I'd agree that has been the case in the past - I've seen reports of HFT firms having something like 300+ winning days. But what happens when the entire market is made of competing bots - will the efficiency the competition essentially take away any advantage that any one player might have, thus making their profit disappear?

unless you have evidence that a particular activity is harmful in specific ways, the question is irrelevant in a reasonably free society

I do not believe that HFTs actually provide value to society at large (and I am familiar with all the arguments and counter arguments).

However, why do you think that "no value to society at large" is a good enough reason to tax or wipe out an industry? Taken ad absurdum, Most people on this earth do not provide any value to society at large, and never will - maybe we should wipe most of humanity?

There are thousands of examples of middlemen and industries that provide values to themselves only. What's your criteria for being a "wipe out" candidate?

For as long as there have been financial markets, there have been people playing the role of market makers, HFTs are just the latest incarnation (although HFTs are not exclusively market makers, it does tend to be the largest chunk of their volumes).

Market makers are people that take no long term view on price movements, just try to provide liquidity in the short run, collecting the spread and trying not to to accumulate positions that are too large either way. Without market makers, prices would be much more volatile (they would just move a round lot because of short term fluctuations of supply and demand with no long term predictive power).

Basically you can think that market makers charge you a small (very small in case of HFTs) fee in exchange for the risk they run for holding inventory for a little bit and in the process reduce volatility.

Before HFTs, market makers were people that had seats at exchanges, which had much more of an information advantage over normal market participants and who certainly charged much larger fees and ripped off people more. The current system, with HFTs playing that role, is by any measure better for both retail and institutional investors.

(disclaimer, am an HFT trader)

To answer your question, HFTs provide liquidity: you can show up at the market, trade with them, and be on your way without doing what they do in illiquid markets, which is to waste time and money on finding someone who wants to trade.

A question for you: why should HFTs be held to the standard that they "provide to society at large"? There's hardly any business that in and of itself (ie not taxes and jobs, which HFT also does) that helps everyone in society. You go to a restaurant, who benefits? Society? I doubt it. You take a cab, who benefits? You go to a hair salon, a supermarket, a gas station, a used car shop, a clothes store, who benefits? Save for the fact that the presence of the shop gives everyone a free option to acquire the goods/service they sell (just like HFT), nobody benefits apart from the customer.

I'd also point out that it can be more simple than that - what you've described is 100% arbitrage. However, perhaps someone simply buys several levels (sweeps) the BATS book. Assuming they didn't also take out ARCA and IWM and everywhere else, it then becomes a race to buy at those exchanges.

Sure that example won't give a risk-free profit, but getting good edge like that thousands of times a day will average out to a nearly guaranteed winning day.

I believe they also front-run (I think this is the correct term) big orders. So if HFT bot at BATS sees someone buying all of the lower priced shares of IWM, the HFT bot tries to buy the shares of IWM at other exchanges that are less than the shares left at BATS and before the other exchanges can update prices from the BATS sale. They have this information about the large order microseconds before the non-HFT firms.

Haha you can say that about war too.