Insider trading is a term with a specific meaning, and that is not it.
People use the term not because it is an exact fit, but because it is the closest match we have and the intention is largely the same.
HFT being a lot about using computers to gain tiny information advantages (racing the speed of light between exchanges for example) to make perfectly safe arbitrages millions of times a day and effectively skim off of the top of the market.
I'm not sure that's a good way to frame them. If you frame them as parasitic, then the argument shifts towards how we can stop them, as they don't provide any value. HFT firms do provide value in liquidity and more accurate market prices. Whether the cost them impose for these is worthwhile is an open question, but then the argument is about how to tweak incentives and rewards to best utilize this resource, not how to prevent it from working at all. The framing matters.
The problem with this point of view is that it implies they are just taking, and not providing. HFT provides a more accurate market price by providing liquidity at small price differences. Whether what they provide justifies their cost is another question though.
I'm not a finance guy, but I've followed it here for quite a while, and this is my general impression of it. I used to be fairly anti-HFT until I learned more about it. Now I'm somewhat ambivalent, except for the topic of rogue trading algorithms, which seem fairly dangerous, but the genie's out of the bottle.
Assuming decreased liquidity is bad (I don't know if there's situations where it's seen as beneficial to the market), the question is how to we disincentivize the use of the ability to decrease liquidity that HFTs have, or do we just accept it as a consequence of their participation, and accept that it happens from regular brokers as well?
> Remember, if a HFT extracts money that means the actual seller and actual buyer's price never meets which means the market is not doing accurate price discovery instead providing two prices separated by fractions of a second.
Just no, that is not at all correct. HFT increases price accuracy, it doesn't reduce it.
Price accuracy is somewhat debatable. Many HFT traders may toss lot's of trades around at a price, but that does not mean you can buy or sell large numbers of shares at that price as they can easily just be trading relatively small number of shares back and forth.
*Dramatic price swings are often tacked onto this. But, that's also relative to number of shares traded. If selling 1,000 shares at ~20.00 each involves any price shift it's hard to call that stable.
No, liquidity means there's limit orders sitting on the market. That is quite literally all liquidity is.
> Stable prices prevent HFT traders from making money.
No they don't, stable prices are good for market makers as it reduces the risk of flipping the spread. You can sit there all day long without prices moving a lick and make bank buying at the bid and selling at the ask getting pad the spread for providing liquidity; this is what HFT's want to do. Directional movement, aka volatility, increases the risk for market makers, aka HFTs as it forces them to predict a direction and makes their trades more risky. Yes, some strategies work better with volatility, but market making is the least risky when price doesn't move at all because you're not making your money from the volatility but from the pocketing the spread over and over.
If orders are going though at different prices that's volatility, even if it's just bid ask spread. Reducing bid - ask spread is how HFT traders are supposed to reduce volatility in the first place. Trade at 10.10, 10.00, 10.10 is price motion even if the trades where buy 10.10, sell 10.00 buy 10.00 because a party needs to sit on the other side of the transaction so all trades are both buy and sell transactions.
That said, you can model only one type of transaction and talk about say sell volatility.
Nope, exactly the opposite, it creates better pricing. HFT is a bidding war to see who can create the best prices and still make enough profit to survive, this reduces trading costs for everyone else by reducing the spread.
HFT firms can't provide liquidity--they don't hold positions! At the end of the day their books are all 0.
If you cross the market then there is nothing the HTF firm can do. When it becomes aware of your order it will be too late. Of course the order you want to trade with might have disappeared while your order is in flight, but that would not be casually related to you sending the order to the market.
> Your order goes out to all of them, and the HFT firm sees it on the nearest market then races (and beats!) your offer to all of the other markets.
No, they have no idea or way to know if your order was big enough to even go to other markets; if they rush out ahead of you and you don't show up, they lose money. What they do is not risk free.
> That's why they care about nanoseconds so much, they're racing the speed of light.
Incorrect. They about latency because all traders have always cared about being first to get their orders in and this would matter whether HFT existed or not. They're not racing the speed of light, they're racing other traders and that would happen no matter the speed of the trading. It's not the speed that matters, it's being first that matters. Even if you outlawed HFT, being first would still matter except it'd be human traders seeing who could push buttons faster.
What's likely happening in your example is a large trade in one exchange triggering adverse selection protection across all markets from multiple market makers.
You can try to classify that as the HFT taking money the seller would have made if they had noticed and repriced quick enough, or taking money from the buyer if they noticed and bought at the original price, but I think both argument could easily be extrapolated to the rest of the stock market and regular users (this plays out quickly, on fairly public info, but it's the same process that goes into someone making a decision on what price to buy at and what to sell at, just sped up quite a bit).
That's entirely wrong. There's nothing safe about it, and they aren't skimming, they're trading exactly like every other trader is, making a guess and risking cash to see if they're right.
"Trading on inside information" is a term for what many people attempt to do that is illegal.
"Insider trading", on the other hand, is when insiders trade, which is totally legal, it's just regulated in certain circumstances when the size of the the trade is large or the person's role is at the executive level, an upcoming trade needs to be announced (made public) in advance as if itself it is information.