What about quantitative trading firms. They make a profit themselves. But how do they benefit society?
Suppose you are a customer with a connection to an exchange. You can't afford to connect to every exchange, because that would cost you a small fortune.
If you stick your order into this exchange, you might have to wait around for someone to meet your price. In fact, there might be someone willing to trade with you at your price, but you don't know it because you're on different exchanges. (Let's not get into NMS.)
An HFT with a view of the whole market would help you distribute your order to all exchanges. They do this by leaning on your order while posting everywhere else. So if someone came in and met the HFT's order in some market, the HFT would turn around and fill you immediately for a small difference, and they'd pull all the other orders when this happened.
That's a service, and you pay for it.
A lot of HFT strategies provide a service similar to this in some way.
If this was such a great service why is IEX becoming so big?
HFT is a nightmare from a CSR view. Those companies provide no real value to society (not by any standard) and even worse: By hiring all those talented young people with degrees in various fields they actually hurt society. Give those people real problems to work on, instead of wasting them on optimizing those HFT systems.
Also IEX is a very small exchange, not one getting huge. Their PR firm is impressive not their size.
Finally there are lots of trading options that allow you multi-exchange order book access. Getting market access is fairly cheap. The expensive part is the counter party risk mitigation. You need someone to prove you are good for the trades you say you are. That has nothing to do with HFT or electronic trading at all.
You'd have to write a feed handler for every exchange, and a real-time composite orderbook so you could see where the best order was at every point in time. For every stock. You'd need to rent the fastest network as well.
This is no different from "I could tile my own roof, what do roofers do that is so useful to society?"
> Those companies provide no real value to society
A lot of businesses provide no real value to society. The only way to do that is to interact with a large portion of society. So restaurants for instance only serve the local market, no real value. I mean who benefits, other than the people who eat there? I could go on with a whole load of other businesses.
Why would I need to rent a fast network for every stock? I didn't say abolish the exchange, I said make the data open, generally available so I can see for myself whats going on. Also smart order routers are there already, so no I don't have to write them again, every other broker already offers them. Now just cut out the HFT frontrunners and I can actually the price I see on the terminal.
> A lot of businesses provide no real value to society. The only way to do that is to interact with a large portion of society. So restaurants for instance only serve the local market, no real value. I mean who benefits, other than the people who eat there? I could go on with a whole load of other businesses.
That may be right, but that doesn't make HFT any better.
High frequency trading is not front-running. High frequency traders 1) do not have a fiduciary duty to other traders in the market, which is a hard (and definitional) requirement for front-running; and 2) cannot see a retail investor’s order before it is executed on an exchange. They can only alter their prices in reaction to orders that have already executed.
> I didn't say abolish the exchange, I said make the data open, generally available so I can see for myself whats going on. Also smart order routers are there already, so no I don't have to write them again, every other broker already offers them.
1. This data is already available for purchase. There’s nothing intrinsically preventing you from acquiring it as an individual. I’ve personally purchased this data as an individual.
2. Even if you can “see for yourself what’s happening”, without the extremely fast market making provided by HFT you’ll be waiting significantly longer just to find a trading counterparty. Your proposal sacrifices the liquidity and price efficiency provided by HFT in exchange for freely available market data, which the vast majority of retail investors will not be able to use (let alone want to).
3. Smart order routing is possible because there is sufficient inter-exchange liquidity. In fact, it is directly facilited by HFT.
I’m not often this blunt on Hacker News, but in this case I think it’s warranted: you do not appear to have even basic familiarity with what you’re criticizing.
This is not an informed thesis. This is just an appeal reducible to the following statement: “A thing cannot be a good service if it has a large and organized opposition.”
>HFT is a nightmare from a CSR view. Those companies provide no real value to society (not by any standard) and even worse: By hiring all those talented young people with degrees in various fields they actually hurt society.
If your thesis is that HFT provides no benefits for society, please provide a substantive rebuttal against the claim that it improves liquidity and price discovery.
HFT increases the availability of bids and asks in the orderbook by rapidly volunteering to be the trading counterparty in otherwise inefficient markets. By seeking the best price for its own strategies and making as many trades as possible with as little latency as possible, the increased liquidity is accompanied by improved price discovery.
> Give those people real problems to work on, instead of wasting them on optimizing those HFT systems.
Please define “real problem”, and please explain how the aforementioned benefits contributed by HFT are incompatible with this definition. Meanwhile keep in mind that the vast majority of companies, including those in tech, likely do not work on “real problems”, so next I’m going to ask why this is a meaningful criticism in the first place.
The greed and complete disregard for society and it's advancement as portrayed through the media and various outlets simply make it a very unattractive career choice to me.
Now this is not meant as a judgement of a whole industry and it's participants, it's simply my naive and uninformed opinion. I would like to read some comments about insiders who might have had my initial aversion, but came to see something different which is positive in some way. Any HFT devs out there with a similar experience?
Furthermore, if I want to sell a security and one of these companies puts in the best bid, then I just made more money than I otherwise would have if they weren’t there. Likewise if I was buying, they might offer me a lower price. Isn’t that a good thing? They are happy and the counterparty is happy.
Then there’s arbitrage. If I am trading on an exchange, but there’s a better price on another axchange one of these firms trades on, they might offer me a better price than I otherwise get. Effectively I d get a price on the other market, without having the costs of trading on it. Again, that’s better for me, where ‘me’ might be your savings account or pension fund manager, or a manufacturer or producer on a commodities market. So these firms reduce costs for other participants on the market.
1. All trading strategies profit by identifying market inefficiencies.
2. Market inefficiencies occur (in general) when the price of a security is inaccurate.
3. By correcting the inefficiency, the strategy profits consistently until there is no longer a counterparty willing to take the trade at that (inefficient) price.
This process is broadly called price discovery.
Tsunami hits Japan and some Japanese computer memory factories are shut down. As soon as this news hits America, the prices of computer memory chips is expected to go up. But there is a delay in how quickly different people hear the news. Some American memory chip sellers might still be selling at the old (lower) price, while some of their better-informed customers seize the opportunity to buy before the prices go up. In this instance, the sooner the news reach America, the American resellers know to increase their prices, and they get the benefit from the increased prices. (And some buyers end up paying more.)
Later, the Japanese have rebuilt and the factories are about to start producing again. Now memory chip prices are expected to go back down. The sooner the new information spreads around, the more people will benefit from buying at the cheaper prices. (And some resellers will disbenefit by having to decrease their prices sooner.)
The well-informed market makers keep the prices as current as possible.
Buyers benefit from new, cheaper prices, but sellers disbenefit. Or the other way round. But we believe that efficient markets are beneficial to society, so the benefit for whoever gains by buying/selling at the most recent price information is larger than whoever lost because they couldn't sell/buy at the old price.
The benefit to society is that less money and human capital is wasted on finance so more money and human capital can be allocated to more interesting things.
HFT is a tiny industry that generates a tiny amount of money and they've largely replaced what used to be a much larger industry that generated a lot more money. That sounds like a huge benefit to me.
https://genius.com/Bill-hicks-on-advertisers-and-marketing-a...
The empty trading pits in the South Loop Chicago and all those new condos downtown NYC are a testament to that.