In statistical expectation, you are better off not selling your stock to an HFT market maker. They are only buying from you, on average, when the spread you pay is more than they expect the stock to move. You could wait and sell to someone else for a tiny bit more, on average.
In statistical expectation, you are better off not insuring your car. The insurance company writes the policy such that their expected payout over its lifetime is less than the premiums they collect.
But real people don't live in the world of maximizing expected value. The guy selling his stocks is doing it a couple times a year, and doesn't want to risk losing a few % if the market gaps down, just to make a tenth of a penny more in expectation. Nobody wants to take out another car loan if their shiny new SUV gets hit driving out of the dealership. Bearing risks people don't want is valuable.
So bizarrely, while these services may satisfy a need, consumers are only really happy when the provider loses. Nobody looks back on decades of crash-free driving reminiscing about paying those insurance premiums. Nobody likes to sell stock and see it tick up.
(And I'm hand waving assuming you're a randomly selected trader or driver. If you have inside information, trading with anyone is positive EV. If you drive drunk at 100mph but have no tickets or DUIs on your record, insuring your car is positive EV.
I'm also hand waving away comparative advantage. That better price an HFT market maker gets when turning over your trade may not be achievable for you. Maybe they can trade on more exchanges or predict prices better to get out at the right time. They do this all day so trading optimally is not a waste of their time, but it's probably a waste of yours. In that case, you may lose more and take more risk doing it yourself. I think that's closer to reality.)
You are also better off selling into a market containing at least on HFT market maker. Without them, spreads become fat. It is notable that the principle aggressors, at the political level and until recently, when HFT became an armchair economics term of art, against HFT were the old line market makers.
I no longer work in HFT. You can do everything better, smarter, faster than ever, and make less. It is one of the most brutally capitalist businesses: orders on exchanges are a pure undifferentiated commodity. The guy making the smallest spread fastest gets the trade. [1] Nobody cares if it's Virtu or Citadel or three guys in their garage. Think of a business like Wal-Mart's, but if someone finds a way to sell soap a half-cent cheaper, you sell 0 and go out of business.
And for the end users of the markets, that's great. Let these guys compete to make tighter markets or arbitrage prices sooner. HFTs play an intermediation role, helping other traders transfer risk immediately to lock in a guaranteed price, rather than waiting for someone else to trade with them. They're basically like CarMax or a grocery store: research what things are worth, buy at wholesale prices, sell at retail prices, and control inventory risk.
1: https://meanderful.blogspot.com/2013/01/hfts-dirty-little-se...
I speak up here because it irritates me to see them maligned by people who know what they're talking about.
HFT allows better-connected traders to front-run you. You don't get the best price because the HFT guy extracted risk-free profits for himself at your expense.
Front running is accomplished by HFT, but not all HFT is front running. HFT is simply the ability to execute trades quickly on new information, like earnings reports, fed meeting notes, etc. HFT back in the 17th century would simply have been having the fastest couriers and horses to carry news, now it's having the fastest software and data connections. HFT has a couple beneficial sides too, as it tightens the bid/ask spread.
Basically don't confuse a technology that can be used for bad purposes, to be the problem, blame the brokers and the regulators that allow it to happen.
HFT adds nothing to the markets of value[1] and lowers the value average players are able to extract.
[1] except liquidity which they usually don't add in a useful manner, they will tend to make highly liquid stocks more liquid while not adding any liquidity to stocks that are being harmed by illiquidity.
If you're going to give people electronic access to the markets, there's not really any sense in saying they aren't allowed to use whatever computer technology they see fit to trade with that access, as long as they aren't actually manipulating the market.
As far as economic value, it has different uses to different players on the market. Speculators can take advantage of increasingly fleeting arbitrage opportunities, yes. But the flip side of that is that institutional investors can use it defensively, to make it harder to find and exploit those arbitrage opportunities.
That basic game of cat-and-mouse has existed for centuries, and, here, almost 2 decades into the 21st century, it seems absurd to me to say that, of all the places people use technology to do things faster, nobody should be allowed to do it in this one particular case. Which when you get down to it, is essentially what people are suggesting when they say that high frequency trading is bad.
If it stills seem unfair to you (and that's an entirely legitimate feeling), I'd submit that it isn't that that using technology is unfair in and of itself, so much as that technology has the potential to magnify the effects of unfairness that was already baked into the financial system to begin with.
Then I’ll settle over the counter, directly with my counterparties, and disintermediate your marketplace. The misallocation appears to be those looking to introduce complexity to solve a non-issue.
Not if that is made illegal.
>those looking to introduce complexity to solve a non-issue
Because HFT is not a huge complexity in itself?
That would be a massive change to the American securities markets. Enough so that it might destroy them. “You can buy or sell your securities at competing venues” is a basic tent of finance.
Does that hold in a turn base system? Whether they played at the start of the minute or its end, they all knew the results of the last turn when they started bidding.
They might have external world info though.
Then again, you can always have the trades gathered during the turn period randomised in order and applied that way.
Yes. The fastest players will submit as late as possible, thereby integrating the most informaion.
There would be no market price fluctuations more fine grained than whatever the tick rate of the turn is.
You’re assuming full endogeneity. That is never the case. Others’ orders are just one input. Other markets’ books and orders are far more important, particularly for derivatives.
Guessing that the market will continue to go up or down (a.k.a 'perceived momentum') is just a gambling strategy used by day traders. There are no long term successful hft operations based on predict the future strategies like that.
Not quite. In a turn based board game, sure, because literally nothing relevant happens outside the context of the game. In real life, plenty happens outside the context of a hypothetical Chicago turn. Most relevantly, New York happens.
(Actually, it’s New Jersey. Land is very expensive in NY, and data centers are fairly large, so “New York” finance mostly happens in Secaucus, NJ.)
fairness for whom? hfts compete with other hfts not retail investors.
Moisture in NJ slows down news from Chicago to NYC by 2 ms.
Automatic market making algorithms in NYC, in the absence of evidence from the options markets, bet on mean reversion and don't adjust their bids and asks as quickly as they would had information arrived from Chicago.
In those 2 ms, two investors each sell 100 shares a penny cheaper than they would have otherwise to the institutional investor with the news-reading AI.
A retired teacher and traditional hedge fund manager are each $1 poorer and someone writing a newsreading bot is $2 richer than they would have been had NJ been drier.
The individual stories are pretty boring, but millions of times a day, a small short-term information edge is slightly more valuable. Sure, 99% of the time both the winners and the losers are institutional investors. However, if you just look at a retail investor (or some institutional investor representing mostly retail investors), they're almost never on the side with a short-term informational advantage.
On the one hand, it's 99% just institutions winning and institutions losing. But, when you zoom in on those 1% of cases where an unwitting retail investor got lucky or got unlucky, there's a bias in their luck due to their lack of valuable short-term information.
On the other hand, those 2 ms might also mean that if a big retirement fund is unloading $10 million in stock to a bank, that bank has an extra 2 ms to simultaneously start selling the stock and get short in the options market before the low-latency market makers adjust prices. Maybe this means the bank is willing to bid $2 higher for the retirement fund's block trade.
In any case, the actions of the HFTs have both positive and negative knock-on effects for ordinary retail investors, even if other HFTs account for the vast majority of the HFTs' profit margins. Sometimes the short-term information comes from the outside world, and sometimes it comes from institutional investors trying not to telegraph their moves on behalf of retail investors.
Tie one with a long string to the fence around a remote earthstation or microwave horn, and let the breeze cause random outages.
Hold on, someone's banging on my door... NO CARRIER
I think it's interesting to see the contrast in those 2 definitions. In the first place you concern yourself with whether or not a service has been performed. In the second place you concern yourself whether or not the money is deserved by way of the action/accomplishment.
I think this neatly separates the two kinds of thinking on this sort of topic. On the one hand, people are appalled that people are making a lot of money without providing any particularly useful service (in the case of HFT, I suppose we could argue that it increases liquidity, which is helpful in some ways, but the market had ways of dealing with that before HFT so I think it's not a super strong argument).
On the other hand, there are people who admire the cleverness, skill, impetus and daring of people who can find ways to make money without providing some kind of traditional service. To those people, the money has been earned by virtue of their ingenuity/initiative/luck.
I think the conflict here is that to many people, the world would be a better place if we valued #1 considerably more than we value #2 (possibly to the point of not valuing #2 at all). It is, of course, not the world we currently live in, but I can understand the sentiment.