High-Speed Firms Now Oversee Almost All Stocks at NYSE Floor
bloomberg.com
bloomberg.com
What is that ? How can that be the reflection of what's going on in the 'real' economy ?
I interviewed at an HFT firm once and they were doing kernel-bypass networking, latency measured in nanoseconds and all kinds of really low level systems programming tasks.
Interesting technical challenges. Except... what does that have to do with the economy ? Why is it that I can make money if my algo runs a microsecond faster than yours ?
Why is that time delta measured in money ? I know there's the very rational technical explanation of how the first to react executes the trade, but just step back and look at the bigger picture here - what the fuck are you guys really doing ?
Are the people writing these algorithms even remotely thinking that the trades can ruin or starve millions ?
Are you even considering that these high frequency "trading" systems have an actual impact on the planet, the air, the water, etc ?
Of course no. They don't give a fuck. In fact, you can only survive in this industry by not giving a single fuck. Otherwise you have to look at yourself and realize what a parasite you really are.
The stock market made sense when securities actually reflected the "real world" performance of companies.
Now it's all reversed - price determines company performance - it's like all companies work for the stock market itself.
I don't like these guys. A bunch of crooks and gamblers who have no idea what they are doing, while everyone thinks they do.
That's why the prognosis for the world economy is pretty bleak - because the insanity is institutionalized already and we have no idea how to stop it.
https://www.chrisstucchio.com/blog/2012/flash_crash_flash_in...
I have no idea why you think an HFT system is somehow more polluting than an ordinary server displaying cat pictures. Could you explain?
Insofar as the stock market doesn't reflect "real world" performance that's primarily due to tax induced distortions. That situation is only getting worse as businesses go global, and the crazy US system of taxing foreign income turns double taxation into triple taxation.
The market is these little packets bouncing off each other and summarized. High numbers of them are not unhealthy. On the contrary, it means more information is moving with less overhead loss to middlemen. (By analogy: What's more expensive, 100k tweets, 10 phone calls, or a FedEx envelope? If you say "clearly it's the tweets because there are so darn many" that would be a weird answer for an engineer to believe.)
If you believe the world economy is going to heck in a hand basket, there exist ways for you to be richly compensated for that expert opinion by sending your tweets into the machine. (Well, if you're proven right.) HFTs will happily minimize the transactional costs you incur while making that statement, as compared to the sweaty, yelling colluding-against-you jocks they have replaced.
That's surely taking things a little too far. Nothing in the real economy changes that fast.
It's cheaper than people doing it, and the lower the latency, the faster a trader can move his position to match changes in the market.
What is the social benefit of Twitter loading in 100ms instead of 150ms? Why is latency important for peoples' stupid mobile apps, but not important for financial transactions?
>Nothing in the real economy changes that fast.
Sure, but you don't want to have to wait for an earnings report to sell your shares when you want to buy a house or something. You want people to always be trading your stock so it's easy to buy and sell. Similarly, when a big pension fund buys or sells a lot of your stock at once you want "people" trading to reduce volatility.
This sort of HFT smooths out prices over this time frame. The thing is, as it smooths out the peaks and valleys, the value in doing so decreases as those peaks and valleys are what made it profitable in the first place.
>That's surely taking things a little too far. Nothing in the real economy changes that fast.
Why? Computers have changed the game. We went from mailing our brokers or visiting them in person to calling them to conducting trades over the Internet. The 'real' economy changes quite quickly.
However, I don't think reality supports the idea that HFT are adding real signals to the market. HFT software has little understanding of the 'world' so they add noise which reduces signal. Taking the markets further from reality.
See: flash crashes. They don't actually have anything to do with the wider economy just feedback loops devoid from reality.
PS: Some software is designed to automatically read and interpreted news, but they often get it wrong moving the market in the wrong direction.
What we do not know and cannot prove without experimenting is whether our electronic markets benefit from following smarter, more complex rules of play instead of the same ones faster.
https://www.chrisstucchio.com/blog/2012/flash_crash_flash_in...
Also, HFT lowers the price for people who do have information to trade with it. In this way, while HFT adds little information of it's own, it does enable better information transmission.
As to lowering the price, arbitrarily increasing or decreasing the price is not an economically useful activity. The value of markets is price discovery, at best HFT reduce transaction costs though this is somewhat debatable as they are extracting money from somewhere.
To see how cheaper liquidity directly enables speculators, read the section "Why Speculators Need Liquidity" in this post: https://www.chrisstucchio.com/blog/2012/hft_apology2.html An example is worked out in detail illustrating the point.
Also, HFTs are extracting far less money than the humans they replace. So if extracting money is what you want to prevent, congrats.
The trader they study reduced the bid/offer spread and trades 80% passively (he is primarily providing liquidity in the order book for others to trade with). His limit orders are more informative about "hard" news such as changes in the index future price than other traders, meaning he tries to buy stocks that are cheap and sell those that are expensive relative to the overall market, steering them toward their correct prices. This is just a simplistic HFT from almost a decade ago, modern prop traders have teams of researchers building prediction models with many more inputs.
And for all that, he earns a realized spread of 0.72 basis points, before paying for computers and employees. 1 basis point is 1/100 of 1%. That's in 2008, a time when HFT was relatively new and competition was less fierce, margins are considerably lower these days, not like making 0.72 basis points is exactly robbing widows and orphans to begin with. No human would make a market for such low margins, no human could react nearly instantaneously to changes in the index/stock prices to set his quotes, and no human could trade hundreds of stocks at once.
How do you think HFTs cause flash crashes? If you look at the middleman's net position on page 3, he never accumulates more than 10000 shares in one direction, and his position mean reverts every few minutes. How could a trader who primarily trades passively (others choose whether to elect his orders sitting on the book), never accumulates a significant directional position, quotes both buy and sell prices on the order book, and who aims to flatten his trades relatively quickly (whatever selling pressure he could create is quickly turned into buying pressure after he's given a short position) have such a large impact on prices?
I don't think trading off news feeds is a typical HFT trade. Some market makers may use these feeds to get out of the way during announcements. Maybe it's an automated trade for hedge fund types, but it's a high-risk, high-reward infrequent type thing. If a trader is incorrectly predicting prices long enough, they'll lose money and go out of business.
However, there is an enormous benefit to getting pricing resolution down from the double-digit seconds level it was at when humans were able to keep up. The market driven by human intermediaries was crooked as a barrel of fishhooks. When these discussions come up, I always urge people to Google [odd eighths scandal] for an example of what things were like prior to electronic trading.
Once you have electronic trading, it makes sense that there either needs to be some "figure of merit" to allow different electronic traders to compete, or else some sort of permanent monopoly for the most successful initial electronic trading firm. Better, I think, that firms compete pointlessly to price instruments at subsecond granularity than that Goldman Sachs simply buys the (thankfully nonexistent) market maker version of Google.
But that which you control, controls you back with equal force.
While it is assumed that the state of the stock market reflects outside reality, it is in fact both ways - the state of the stock market affects and changes outside reality. And now it's a feedback loop, which involves software on one side and humans and "natural resources" on the other.
So now the married couple's daughter future is dependent on the outcome of this "game of trades" that HFT algorithms play day and night. And the people who write those algorithms do so to satisfy themselves, they don't know or care about the married couple.
Just like Google Maps - when there are few drivers using it, it's a handy little helper, if everyone uses Google Maps, it now defines the traffic pattern.
Sure you cannot front run a single exchange when every buy and sell is on that single exchange but that's not how the actual market and front running works.
HFT requires that the market is distributed. You can say this is market maker arbitrage but it is actually equivalent to front running the market the same way a retail to broker initiated trade can be front run.
As Shannon told us, information is the resolution of uncertainty, and information channels can be more or less noisy.
It occurs to me that it's possible that adding more data to the channel is making the channel more noisy not more informative.
Can you explain this further in context to the parent comment? You lost me after "married couple wants to send their daughter to college more than they want google".
That said, the first example quoted don't really make a lot of sense, in my opinion. A couple selling off some stock to pay for their child's tuition probably won't ever have their transaction directly represented in the market (it will likely be lumped in with or divvied up from other orders handled by the same brokerage), so the information conveyed is ultimately somewhat diluted.
It's simply another mechanism for gambling.
HFT also rarely involves value investing (how much research can you do in a millisecond?). It usually uses low-to-zero-profit market-making strategies as cover for higher profit less than ethical trades.
The crux of my complaint about Flash Boys is that it leaves the reader with this impression, which is usually an incorrect representation of what is happening.
A better simplification of what is happening is that the HFT firm is racing to update the price on shares they are already offering (or on buy orders they've already placed).
That is, they are more like a shop keeper changing their prices when they notice demand than a ticket scalper racing you to the ticket window.
On the one hand we have an ultra fast HFT that is just sitting there trying to do only latency arbitrage between 2 venues. On the other we have an ultra fast HFT that is making markets on multiple venues. For the first HFT the upside to their strategy is that they can hold very little inventory. Of course they are not going to be able to buy orders that are already at the correct price. That is, orders that could have been put in place seconds, minutes, days or weeks earlier are going to have time priority regardless of how fast the pure latency arb player is. They are also going to be wrong some percentage of the time. Meaning they are going to have inventory they need to unload and all that entails.
Meanwhile the market making HFT has more inventory risk, but they also get some of the latency arb for free, as they are already at those positions. They get some of the latency arb the same way the pure arb player does (ie they are super fast as well) and when they are wrong or lose the race they also have sophisticated inventory management processes in place that they amortize across all of their strategies and not just the latency arb ones.
It turns out that the second model is more profitable, and that is very very important when you are investing in super low latent bespoke networks as part of your operational model.
Luckily there is an easy way for you to prove your contention. The market data feed and order management specifications for all of the exchanges in the US are available as public information. Find a single one that allows that order of operations.
Until then maybe don't spread lies.
In order to prove what you are asking for would need full access to the realtime feed AND corresponding time-resolved data from multiple brokers where a buy call gets intercepted.
Where is the lie in what the GP wrote? A quick Google search supports what he wrote, eg. the RBC story.
In particular though, most exchanges follow a pattern where market data is broadcast (usually udp) and order management is bidirectional unicast (usually tcp/ip). On the order management side, no one sees your order until after the exchange does. The exchange then executes the order (filling it if there is match on the other side, or adding it to the order book). It then propagates down the market feed side the outcome of that order. Only then do other participants see it, regardless of how fast they are. There is no opportunity for the fast operator to get in front of the order as the GP describes.
You can verify this easily for any exchange you like (at least SEC regulated ones in the US) by reading the technical specifications of the electronic trading platform.
I don't know what google search or RBC story you are talking about, but in Flash Boys for instance, they make pains to imply that HFT are front running orders as the GP describes but they never say it outright. Because they know it can't happen. A good rebuttal to Flash Boys is Flash Boys, Not So Fast.
Also the RBC story is the central story of Flash Boys.
The Amazon review is based on the premise that Kovac doesn't know what he's talking about at all (that's a tough sell, since Kovac runs a trading firm), and builds that argument through fuzzy error claims like "Kovac got the number of trading venues at a particular date wrong" (the whole value of Kovac's prop firm was that it traded in zillions of markets) or "Computerization was less impactful in bringing down spreads than decimalization".
Kovac's book, on the other hand, is hundreds of pages of page-by-page technical criticism of the Lewis book.
This reviewer was supplied by Kovac with a mountain of rebuttable claims. What they came up with was "Academic and industry researchers have certainly found compelling evidence of high frequency trading firms front-running demand". But "front-running demand" isn't a technical term; it's an advocacy label coined by people who oppose algorithmic trading!
When your mic-drop closing criticism, the one you expand upon in your "updated" critique, is a tautological restatement of the position you're advocating for, you're doing something other than technical criticism. Which is fine, but let's be clear about it.
Problems I notice. 1) How are you jumping ahead to buy at Y? 2) How do you know someone is willing to pay at Z.
I guess if in your scenario the spread is larger and there are outstanding orders at Z but the way you explain this problem is incorrect.
Is there really a difference between:
I see you want X, so I go buy X and sell it to you at a slightly higher price to make some money.
I see you want X, so I take my X out of stock and sell it to you at a slightly higher price to make some extra money.
I'm not sure they are really different.
If you think the price shouldn't be impacted by that, it means something very fundamental about markets.
But scalping is an interesting example for another reason. Ticket scalping is a response to an extremely inefficient market. Scalping can only be profitable if people are willing to pay more than face value for a ticket.
It might make sense to restrict scalping for tickets, because artists might want to make tickets available to people across a wide spectrum of means. But that is never the case for tradable instruments. Restrictions on scalping deliberately seek to impede price discovery. The whole point of liquid trading markets is that the price of the instruments being traded is supposed to reflect their actual value.
Again, I may be misunderstanding, but if this is truly analogous, I completely fail to see the utility.
But there are thousands of other places where the same shoes are being sold. If the demand for the particular sneakers they bought climbs, they will make money. But it's just as likely that the demand will fall (in fact, it's much more likely that demand will fall in the instruments HFTs trade --- that's what those instruments do! They take random walks!), in which case that inventory they bought is a liability.
You've just done a huge rant on how they have a smooth-running machine destroying the economy, making billions, being ruthless, and now you say they "have not idea what they're doing". Sorry mate, but these people know exactly what they're doing. In fact, most of them are really fucking smart, and that's why they're able to get away with legally extracting tens of billions of dollars from the markets.
People seem to defend HFT for some reason (the front running kind, not the necessary arbitrage kind) but they never seem to answer the question of why someone who is not an HFT firm would want to trade on an exchange that caters to high frequency traders (as basically every exchange does).
I do not see how that will solve the problem. Suppose firm A and firm B both want to buy stock X at prize Z. There is only enough X at prize Z for one of those firms. Both firms send their trade orders withing milliseconds of each other. In your time interval scheme, which firm gets to buy the stock?
I think a better way to change exchanges is to dramatically decimalize the price levels. Right now the difference between 2 price levels a) adds a floor to the minimum spread and b) prevents strategies from truly competing on price requiring them to compete on time.
The value of further decimalization seems questionable. It would in all cases reduce displayed size. Would transaction costs still decline due to tighter spreads? For the liquid lower-priced stocks, probably. For stocks whose natural spread is > 1 cent (most of the expensive stuff), certainly not. For everything else, hard to say.
Maybe a Japan/Europe-style tick increment schedule is a good compromise.
The idea that reduced tick sizes would force traders to compete on price rather than time is a popular HN market microstructure solution, but it's wrong or at least partly wrong.
1) Liquidity taking strategies will still "compete on time" in order to trade at the most favorable prices. Market making strategies will still "compete on time" in order to avoid getting picked off.
2) Inverted fee venues and midpoint order types offer sophisticated traders the opportunity to trade at prices within a 1 penny spread. If you watch the tape for a stock like ZNGA you will see this type of trading.
3) There are a number of high priced / high volume stocks that don't trade at a penny spread. GOOG is a good example. Do you find GOOG trading to be somehow cheaper, more orderly or efficient than e.g. MSFT? The GOOG spread is almost never a penny and is regularly over 20 cents. If the benefits are there, they ought to be obvious.
The reason I like reducing tick sizes (and I mean dramatically like 1/1000th or more) is less about the bid ask spread at the middle, but rather the competition at the +1 levels. A lot of the latency advantage right now is in being able to cancel a few levels near the midpoint while leaving tons of other orders stacked.
Reducing tick sizes would make these deep stacking strategies less viable, which seems (though I have no proof) like it would make the positions of the market makers less risky in a systematic way.
As for GOOG vs MSFT, I think that is obviously explained by the much higher price of GOOG right? Nothing is going to make holding a stock that costs more less risky, even speed.
"Having some participants whose primary competitive edge is speed is not in and of itself bad, but speed advantages tend to consolidate around a few natural monopolies, which is. So if we could add something else into the mix that allows for other participants to compete outside of those monopolies, that is good. Dramatically reduced tick sizes would do that, would at times make the spreads smaller, and might even make market making less risky systematically and doesn't seem to have the downsides of other options proposed".
Of course that could have been due to macro trends around volatility that have reversed recently as well, I suppose.
If you instead mean that individual traders could input orders with floor and ceiling prices, that's something that already exists, but now you're back to the original problem of resolving whose orders execute when (inevitably) most of the orders don't match.
There are a number of incorrect assumptions built into your comment (most notably that prop HFT are the only ones using algos to trade), but the simple answer to this question is that those exchanges have larger displayed size at better prices.
Can you point out where I made that assumption?
There are network effects in trading: people go to transact where everyone else is transacting. Because HFT is allowed on the most popular venues, the economic thing to do is hold your nose and trade there too. This is true even if HFT somehow makes the venues "worse" (which it doesn't).
HFT reduce the risk of the inventory they hold by being able to adjust the prices of that inventory fast.
HFT Market Makers can therefore price the service cheaper as their risk is less, due to the speed.
Takers exploit the option value of resting orders by trading when "fair value" moves but those orders don't. "Real" investors are better off because they cheaply acquired a security they may hold for years (the fact that the price will shortly move against them by a penny or two is irrelevant). Market makers are worse off--but they're HFT guys, and it's not really your problem.
A person buying or selling individual stocks for their own portfolio isn't impacted by HFT at all. Their orders probably never see a real exchange. Instead, internalizers pay extra money to offer brokerage customers the best possible prices for what they're looking to trade.
That's because HFTs aren't the apex predator in the markets. Informed institutional traders like Goldman are. Market making operations are built around mitigating the risk of getting run over by giant block trades from institutions. When those happen, they take out whole swathes of the order book and leave adverse price changes in their wake.
An electronic market maker will pay a premium to make safe profits off the spread of retail orders, because to a first approximation none of those orders are going to take out the whole book.
Meanwhile, among institutional traders, there are two kinds of firms to look at.
The first kind, the Royal Banks of Canada of the world, are getting paid a tidy sum of money to make large block trades for the cheapest possible price. The RBC trader has knowledge that the rest of the market doesn't: many tens of thousands of shares of something are about to trade, and that trade is going to move the market. They make money by trying to disguise their intent, so that instead of the market price reflecting that intent, they can capture the premium and leave everyone else in the market to hold the bag.
Those kinds of traders hate HFT.
The other kind, the Vanguards of the world, buy or sell based on long-term strategies. They're buying CSCO or MMM to fill out an index. They want the best possible price, of course, but they mostly care about determinism and low cost of trades.
Those kinds of traders like HFT. (You can see the Chief Investment Officer of Vanguard, the world's most trustworthy mutual fund company, saying that repeatedly and emphatically). HFTs reduce spreads and make trading cheaper, and Vanguard doesn't earn profits by taking it out of the hides of their immediate counterparties.
As a public policy matter, I'm not sure why I'm supposed to support regulations that increase Vanguard's cost of trades so that an equities desk at RBC can charge higher premiums to fleece the markets on behalf of their hedge fund clients.
https://www.chrisstucchio.com/blog/2014/how_to_not_get_rippe...
The reason is that it's not a matter of waiting a whole second and being guaranteed a fill. It's placing an order and accepting execution risk; maybe you get a fill, maybe you are stuck holding a tanking stock.
I'm not defending the front running kind. The argument is that the front running kind (which is in no way actual front running and is instead latency arbitrage) is the same as, and fundamentally a requirement of the arbitrage kind.
Further, most peoples model of what latency arbitrage actually is, is so flawed as to create strong biases when they shouldn't exist.
The euphemism HF traders use to help themselves sleep at night.
We don't assume other kinds of middle-men require sleep aids when they do this kind of behavior (and in fact we usually encourage it), so I don't know why HFT folks would need them either.
This is all just ways of saying HFT is exploiting a loop-hole in a system to make money for themselves.
They could all be eliminated overnight and the free-market system would not notice their absence at all.
They don't provide a service to anyone besides themselves, they don't provide liquidity, they are nothing except parasites.
I really see no difference here than the days cars replaced horses, milk delivery came to an end, newspapers struggling with the digital age. Come a generation if not less people will look back at our ways and go "how quaint". The solution is to adapt to what technology brings so that we can better ourselves. so while it may be unfair now the technology will spread to where everyone operates that way
Capital markets are a place where firms go to acquire capital, people with excess capital buy securities, and firms (eventually) return that capital. The markets are only a reflection of the pricing of those securities, which sometimes but doesn't always correlate to what's going on in the economy.
If I put in a market order when the price is $100, and a HFT firm sees my order, beats me to market, buys up all the $100 offers and then resells the stock to me at $105, my liquidity hasn't been improved in the slightest. All that has happened is that someone has front-run my order and cost me $5/share, extracting profits from my pocket without providing any useful service to anyone.
If you want this comment in more technical terms, here it is:
http://www.zerohedge.com/news/2015-08-25/cutting-through-hft...
Flash Boys is an entertaining write-up of how the firms are inserting themselves, and how they are "seeing" orders at one exchange before the order arrives at another exchange.
The "Flash Boys" case is a funny one. The HFTs did see the orders--but so did EVERYONE else, and in basically the same instant, because all transactions are publicly disseminated. Your point is right in a very narrow sense and very wrong on every axis that actually matters.
I'm mystified as to why Flash Boys didn't valorize high-frequency trading. It's a Moneyball story where the scrappy nerds use computers and math to out-compete the dinosaurs. Oh well.
A lot of HFT argumentation only makes sense when you assume prices only go up.
> Are the people writing these algorithms even remotely thinking that the trades can ruin or starve millions ?
No they can't, by definition, high frequency trades have very small price deltas and each one matters very very little to the broader market.
An abstract way to think of HFT is that it condenses money out of information. This is exactly what ad-driven businesses like Google and Facebook do too, but HFT doesn't require massive databases of information about all of us, plus it is more energy efficient because it doesn't have to send the same copy of a cat GIF over the air to 350 million people just to make half a cent in ad sales.
Being faster actually helps with that purpose.
It's a stock market simulator with a websocket API that you can code against to run your own trading bots in various scenarios.
I am currently on level 3 where the exact goal is to write a profitable market maker bot. So far my bot is decidedly UN-profitable, but I hope to change that soon.
[1]: And here is the thread when Stockfighter launched on HN: https://news.ycombinator.com/item?id=10724592
+ Most investment games generate a spot price by magic and let you transact at it as much as you want. We have actual counter parties (bots) running their own strategies, the number, composition, and interaction of which determine the prices available. This is complicated; most simulations abstract it away to focus on their particular areas of interest. Having a nice crunchy view of market microstructure wrapped in an API is our interest; we in turn punted on a lot of other things. A big one: many people interested in stock markets want to trade Google; Stockfighter doesn't have Google but might have e.g. Amalgamated Tree Frog Airlines (ATFA), with a fake-but-almost-plausible market dynamic to it much of the time.
First - a quick explanation of what these market makers do. Every security is primarily listed on a single exchange. In the US, this is dominated by NYSE and NASDAQ. Any listing exchange assigns market makers to the securities that it lists - these firms guarantee that they will both offer and buy the stock within certain limit and pricing restrictions. In return for this responsibility the market makers get price breaks and other preferential treatment. NASDAQ never had a floor, so these were just designated firms you could (in the early days) call. NYSE, on the other hand, assigned this responsibility to specific individuals from firms - all in one building on a single trading floor. Once the markets electronified, it was easier for the NASDAQ market makers to adapt and become electronic and more automated as well. As NYSE held on to the old model of individuals on the floor, they attempted to justify it - mostly by spreading distrust of computers. (Distrust which has proven partially justified - see the Knight Capital meltdown a few years ago.) Despite their arguments that the humans are adding to the stability of the market, the reality is the humans are doing less and less. For the last 5 years at least all floor brokers and market makers are managing most of their orders electronically with the help of "upstairs" - other employees of the markets makers / floor brokers who are upstairs. Furthermore, the benefits that come with being a market maker apply to some of the firm's electronic business as well - effectively making the floor presence a cost that is made up off the floor.
TL;DR - The NYSE floor is a joke. This just proves it.
Computers only do what they're programmed to do by humans. Inherently, distrust of computers (sans AI) is distrust of humans.
What strikes me is that if automated trading is profitable, then it must be predictable as well, meaning trading and market direction is more "Non-random walk" than "Random Walk" ..
On the equities side, if you went to a dollar per trade it would be priced into the spread one way or the other. My suspicion would be with decreased liquidity due to participants moving to derivatives that allow for ownership in fractional components of large transactions that make the tax more bearable.
Either that, or you wouldn't have market makers and the equities market would grind to a halt and things like index funds, etfs, etc would no longer be economically viable.
HFT on the other hand is the brutal unempathetic cousin of intra-day trading that completely takes the human element out of the picture. Stocks are bought and sold in micro seconds, creating an unsustainable and unlevel playing field for the real humans in markets.
To this day, I fail to see how was this even allowed by regulators. HFT systems should be pitted against other HFT systems on newly created indexes or an alternative system, where humans are not allowed to trade for their own benefit. The current ecosystem is just unsustainable.
HFT is the true essence of trading--predicting short-term changes in supply and demand and acting accordingly.
> This used to give us a real picture of the public sentiment for those companies or commodities.
Can you pinpoint some moment when it stopped?
> Stocks are bought and sold in micro seconds
Most HFT strategies don't actually do this. Buying and selling in such a short period implies a pure arbitrage, of which there are very few. The ones that do exist are generally fully exploited by the single fastest participant.
> creating an unsustainable and unlevel playing field for the real humans in markets.
Depends on your investment horizon. The statement is nonsense for all but the shortest timeframes. In particular, the fundamental finance guys (the "investors") are in no danger from the machines.
> The current ecosystem is just unsustainable.
Why? Automated market-makers are a middle-man that temporally bridge supply and demand between "real" buyers and sellers. Kind of like a grocery store temporally bridges supply and demand between consumers and farmers. Kind of like a car dealer temporally bridges supply and demand between consumers and manufacturers. Kind of like... you get the idea. Why are equity markets different?
I assumed most were of that sort. I still fail to understand what does being one millionth of a second faster accomplish if you're going to hold your position longer than that. It still triggers a competition for being the fastest participant that makes the transaction right after an event.
>Why? Automated market-makers are a middle-man that temporally bridge supply and demand between "real" buyers and sellers. Kind of like a grocery store temporally bridges supply and demand between consumers and farmers. Kind of like a car dealer temporally bridges supply and demand between consumers and manufacturers. Kind of like... you get the idea. Why are equity markets different?
That's an interesting thought. It may just be that the subject has a lot more elements that I haven't considered yet.
Here's something for you to consider and I would love to hear your POV on this. What if the regulators decided to ban all HFTs. Transactions had to rate limited by 300ms or more. In your opinion, would the markets behave any differently from now? If not, then what is being gained by all the major investments in HFT systems and platforms? If yes, then what do the markets gain?
A simple example: suppose AAPL is currently quoted $95.00 x $96.00. A reasonable estimate for the "fair value" is the midpoint, $95.50. Now, a new sell order for $95.01 arrives at the market. AAPL is now quoted at $95.00 x $95.01. In the absence of other signals, a trader might reason that there's something wrong with the guy selling at $95.01 when everyone else thinks fair value is ~$95.50. If so, he'll rush to trade against the new order. First one to get there gets shares cheap; everyone else gets nothing. Hold the position for as long as you like.
There are a lot of details to get right, but this is an actual HFT strategy, not a toy example. Note that your speed matters only insofar as it lets you trade ahead of everyone else. All the infrastructure investment is required to stay ahead of other participants, but it does not confer a durable advantage: the arms race will quickly erode the edge. The investment is best-viewed as a tax imposed by other HFT firms, paid to technology vendors and exchanges. The big winners are those who sell the equipment and fast lines that certain HFTs desperately need.
> What if the regulators decided to ban all HFTs. The market would look pretty similar to how it does today. The big change would be somewhat wider spreads: market makers need to compensate for the additional risk they take on by leaving their orders out. Any other traders here have an opinion?