Comment by qeternity | Hacker News Reader

Comment by qeternity | Hacker News Reader

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Most HFT shops are relatively small. HFT is all about latency and turn over. Big quant shops might have HFT elements but lean far more towards systematic/algo strategies that can be relatively high latency (still super low latency, but not HFT) because these are the only strategies that you can deploy serious var with. The guys crushing HFT are not huge hedge funds, and they are solving more engineering problems than building trading models.

Also, no, small traders don't lose. Retail traders et al get much tighter spreads, cheaper execution by routing to internalizers, etc. It's big institutionals with size to trade that get front run and have to worry about HFT killing their shortfall. On the institutional side, it's about lit venues preferring HFT w/ special orders types and thin top of book. On the retail side, the issue mostly comes down to direct feed vs. SIP/CQS thanks to NBBO that opened the door for latency arb courtesy of yet more regulation. Blame your regulators folks. This is why dark pools became a thing.

> and the liquidity support they provide to the markets is dubious, at best, since they pull the plug as soon as things get crazy

This bit is certainly true.

Source: hedge fund trader who hates HFT not in principal but because they are good at what they do

This used to be true. Small HFT firms can find a niche thats profitable, but thats because there isnt enough money to be made by the big firms in those niches.

In the last few years there has been massive consolidation of the smaller HFT players, the space is commoditized and controlled by a few firms.

Yes, consolidation and layoffs. Go see how many KCG guys were kept by Virtu. If anything the industry has gotten smaller. People are just buying up flow now. There are no "big" HFT firms when compared to proper buy side.

> the space is commoditized and controlled by a few firms

Few firms != big firms

Yeah its funny, I still read outrage about those greedy "HFT players", as if HFT was still highly relevant. It was a blip in time of the financial markets when no one had high speed trading but a few. The alpha has been washed away.

"c[1] is a bitch" - most HFT quants past few years

[1] - https://en.wikipedia.org/wiki/Speed_of_light

> The alpha has been washed away.

whats that mean?

so what are quants on the street doing now?

Quant !== HFT

whats the diff? What are people working on hft solutions called then?

any resources or further reading u can point me to?

Of course the retail guy gets hurt. Who do you think buys the mutual funds that pay a higher price.

Seriously, I hear this all the time, but it’s only one step removed. Why does everybody keep repeating this lie?

Vanguard states that hft activities have lowered their trading costs, so I don't think this claim is necesarily true.

HFT has reduced costs under 99.99% of market environments. My direct cost and slippage is still so much lower than it would have been 30 years ago. Hell, even 10 years ago.

Where would the profits that go to HFT outfits go if HFT wasn't a thing? Genuine question, I have no idea how that works.

They would go to whomever else was marker makers, whomever else was doing short-term trading, and some of fhe rest to quant firms doing frequent but not hft trading.

Mostly human traders/market makers in short.

They would simply vaporize. At the margin, people trade because the frictional costs (spreads, fees, pricing/tracking error, risk) of trading are low. Fewer people would trade.

HFTs basically play an intermediary role: risking capital to buffer supply/demand imbalances, aiming to buy things at a discount or sell at a premium to their perceived value. The more transactions an intermediary does, the smaller his margins per transaction can be. Low margins fuel even more transactions in a virtuous cycle, and competition drives margins down.

Take this thought experiment to an extreme level. What would happen if short term speculation were banned, all stocks traded January 1, and had to be held for a year? Only very wealthy people with high risk tolerance could participate in the market, since they couldn't sell companies at will to fund personal expenses or if the business underperformed.

Volumes would plummet. Exchange/brokerage fees would be a significant percentage of the deal size, similar to what real estate agents charge, since they can only do a few transactions. Intermediaries would be something akin to a private equity fund, bidding 10-20%+ under value to cover the risk of holding for a year.

Even with trading reduced to once a minute/hour/day, many trades HFTs take the other side of now--say a medium frequency quant fund believes a company is underpriced by 0.1%--simply would not exist anymore, because spreads and fees would increase. Most ETFs would disappear. The marginal cost for an HFT to make markets in some small ETF is basically 0, but a human would make more at McDonalds than market making an ETF that trades a few hundred thousand shares a day.

As noted elsewhere in this thread, I suspect new markets would spring up. If the underlying could only trade once a year, the options market would be huge.

Yes, this is indeed true. Not sure why you're being downvoted. The distinction is still one worth making, because average retail investors can typically have better transparency on this in a mutual fund vis-a-vis tracking error and management fees, whereas a retail trader in the open market is going to have almost no idea where the market really was for that market order they dumped into their Etrade account.

> Of course the retail guy gets hurt.

Nope. Retail traders get better prices; it's the big hedge funds that lose.

> Who do you think buys the mutual funds that pay a higher price.

The big index funds are paying a lower price.

> Why does everybody keep repeating this lie?

Because it's true.

Can you explain to me why an index fund would pay less but a hedge fund would pay more? They are all buyers in the market, and index funds are more predictable, as they have to (roughly) adhere to their index. Once an index changes, they have a limited time to buy or sell. GE being kicked out of the Dow last week is a great example.

> Can you explain to me why an index fund would pay less but a hedge fund would pay more? They are all buyers in the market, and index funds are more predictable

And that's the reason. Market makers (and especially HFTs) profit from razor thin spreads on predictable orders, but they can lose money when they get hit by a big unpredictable order, so they avoid them and/or charge them more. A hedge fund's order is inherently dangerous to a market maker, because they have no idea before the fact if the hedge fund is just offloading 1k shares to rebalance their risk profile, or if they're liquidating their entire position, or taking a big short position. Hedge funds can change the entire market. Some guy calling up his broker and asking to sell his Apple shares won't.

So retail orders and index funds are safe, so they can be charged lower spreads. And because they're profitable, market makers compete for the volume, driving down prices. And the data supports this - prices paid by retail investors has crashed, and complaints from hedge funds and big active investors has spiked. :)

"Also, no, small traders don't lose. Retail traders et al get much tighter spreads, cheaper execution by routing to internalizers, etc."

There's liquidity until there isn't. It was easier to get an order filled during a run to the exit pre-HFT. When everyone runs to the exit in an HFT world, retail investors are the last to get their orders filled, if they're lucky.

I don't know if this is true, but higher liquidity and lower spreads reduces the cost of every trade, which is money in the pockets of retail and value investors. I assume this is why Vanguard says HFT has been helpful for them (despite the fact that they don't do HFT themselves).

Aren't the cost of the trade and price of the trade two different things? Tighter spreads can only do so much to offset disadvantageous pricing, right?

What difference are you making between tighter spreads and disadvantageous pricing?

No, you cant. The spread is the difference between the bid and the ask. You can't have disadvantageous pricing without affecting the ask. Which would in term drive up the spread.

HFT helps tighten spreads for smaller investors, and also itself benefits from the tighter spreads.

But, to the extent that you believe the argument that HFT is essentially front-running, then HFT gets the tight spreads and better pricing.

People believe all sorts of weird things, but the actual offense of front-running involves an agency relation: it occurs when you work with a broker/dealer to order your securities, and upon receiving your order, they trade for their own account ahead of yours.

Market makers aren't agents of traders.

>the actual offense of front-running...

Sure. That's why I wrote "essentially" front-running. Perhaps I should have written "effectively" to better clarify?

In any case, I am referring less to the tort and more to the common complaint that people have about HFT: WRT how it disadvantages small investors.

>People believe all sorts of weird things

Indeed. But, I don't believe that to be an esoteric complaint. In fact, it seems to be one of the chief complaints where HFT is concerned.

I don't know if "esoteric" is the word. You're saying, lots of people seem to believe that the advantage fast electronic market making has over "conventional" trading is a form of front-running.

That is true. But: it is not.

Lots of people also believe that high-end market research (for instance, targeted research and maybe even electronic surveillance about how many widgets a company has sold) is a form of insider trading. But: it is not, even though lots of people say that, and for the same reason.

In both cases, people believe there is something shady about people going to extraordinary lengths to obtain a trading advantage. And, in both cases, not only is the market resilient to those efforts to gain advantage, but the markets are theoretically improved by them. The point of a market is to expediently arrive at the best (as in, most reflective of intrinsic value) price for something, and to make it efficient for people to buy and sell at that price.

I am aware that people believing a thing doesn't make it true.

I am also aware of the arguments in favor of HFT. As you stated, the oft-made claim that the market is improved is theoretical as well; hence, is also a product of "belief".

It's not a settled question. [0]

>The point of a market is to expediently arrive at the best (as in, most reflective of intrinsic value) price

Yes.

[0] https://www.investopedia.com/ask/answers/09/high-frequency-t...

The improvement I'm talking about is objective: in the former case, by competing down spreads and minimizing the cost to execute any given trade, and in both by expediting price discovery.

You can disagree that these are things worth optimizing (though if you weren't careful you'd risk arguing in some sense against the premise of a market), but it's less clear to me how you'd argue that the causality is other than what my argument says it is.

I don't dispute that HFT can reduce spreads. The question is whether that benefit may come at some expense to smaller investors.

See the previous link I posted. Also, of course, "Flash Boys" by Michael Lewis. There is no shortage of discussion around this question.

How does that question even make sense? By definition, the spread is a tax investors --- including small investors --- pay to buy or sell a holding. In what way could they possibly benefit from wider spreads?

Regarding Flash Boys: I don't know of a single person who works in trading who has stuck up for that book. I strongly recommend "Flash Boys: Not So Fast", which debunks it but is also much more interesting from a technical perspective than Lewis's book.

>in what way could they possibly benefit from wider spreads?

Never said that.

We seem to be having trouble communicating. It happens. Thanks for the discussion.

Manning rule dictates that retail orders held by a market maker must be filled before any other orders (or equally that fills must be given to the retail order), brokers don't look kindly on firms that reject customer orders with any regularity, and anyways retail flow on a volatile+wide spread symbol are loved by market makers.

This. Even in markets with last look, you will lose your flow if you dick about too much.

I know of certain firms that will never reject retail orders unless they're truly invalid and will just fill at a loss to keep their flow.

Yeah and the old DMM's used to stub quote when things got rough. Same shit, different day. Under most environments, HFT has been a net positive particularly in the single name options market. Pretty much every name out there is quoted with decent depth because an algo can now quote a few vols either side and make decent coin given that it costs nothing to stay laid up these days.

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