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Comment by cryptofistMonk | Hacker News Reader

I'm sure the exchanges like the buckets of money that HFTs pay them, even on their discounted commission fees. There's also billions in industry just around supporting HFTs, including FPGAs, silicon fab, networking equipment, etc. The cost to society of killing HFTs would probably be fairly large and imo the drawbacks are mostly minor.

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All of the money HFTs make would have been made by other investors, presumably for reasons more related to predicting or responding to actual changes in market conditions. HFTs are parasites that basically leech value from those trades by executing them faster than you can, and forcing you to buy at a higher/sell at a lower price. I think the platonic ideal of a marketplace involves making money by determining the actual value of goods, not stealing information from others and jumping the line.

They also contribute to a lot of market instability, see for instance the flash crash[1].

[1] https://en.wikipedia.org/wiki/2010_flash_crash

I don't like these type of comments because they show little understanding of how the market works.

Explain the process in which the HFT firms "leech value" from your trades or "[steal] information and [jump] the line"? Your trade arrives at the exchange. Then, the HFT firms learn about your trade. They then price correct many instruments and derivatives that are all inter-related.

Now, if we are talking about quote stuffing or intentionally trying to DDoS exchanges, everyone agrees this is bad behavior and is regulated against.

Finally, as you mention, these type of algorithms contributed to market instability of the flash crash but it was also initiated by large (slow) directional bets. You propose taking the oxygen out of the room of a fire but one can also propose removing matches that started the fire.

If prices are out of line, that definitely seems like a place where automated trading would be valuable. But HFTs' tech advantage isn't just about finding a better arbitrage algorithm or being smarter: it's also quite clearly about exploiting a pure technical advantage over other traders. The fact that HFTs are so willing to invest in speed even to achieve a tiny advantage over other HFTs kind of gives the game away.

And when people quite rightly observe that having a speed advantage over other traders obviously allows extractive behavior like frontrunning, a bunch of people on HN come out with irate counter-takes that claim HFT are an unalloyed good -- never something nuanced like, "yes HFT could allow for some extractive behavior, but it's counterbalanced by these advantages which I will explain in detail." (And the corollary, which is an explanation of "why a world where all traders have the same speed advantages wouldn't have all the claimed advantages of HFT but be even more efficient.")

I guess it's also worth pointing out that these responses are usually from people who are involved in the HFT industry in some way, and usually they start out by accusing people of "not understanding the industry". Which is precisely the accusation many make against HFT: that it's so deliberately opaque that people outside the industry can't possibly determine how much extraction there is compared to value being added. Saying "trust us" or "you couldn't possibly know because you aren't on the inside profiting from it" is not the compelling argument you think it is.

> The fact that HFTs are so willing to invest in speed even to achieve a tiny advantage over other HFTs kind of gives the game away.

Re-pricing s&p500 futures offers in Chicago based on faster stock offer information from nyc is fine. It’s improving a market making strategy or taking offers that look like they will now be profitable.

> And when people quite rightly observe that having a speed advantage over other traders obviously allows extractive behavior like frontrunning

HFTs do not front run for fucks sake. It’s illegal and this meme needs to die. Front running is literally putting your order in front of a client’s order.

Being the fastest to realize the bottom is falling out of the s&p500 and selling the futures contracts on open bids is not front running.

> HFTs do not front run for fucks sake. It’s illegal ...

This is objectively false. Cursing does not strengthen an argument. HFTs paid to jump the queue. It should be illegal but it is not. There are a number of low-latency strategies that are beneficial for price discovery such as index arbitrage or market-making (with requirements to stay in the market). A strategy that is not beneficial is to pay the exchange for first-look. That is front-running.

First look is still not front running. Unless you are able to get your order in before other orders, it’s not front running. Get it?

Being the first to look at new orders is nice, but the orders are in the queue so there is no way to get in front of them.

Here is a link to help you: https://www.investopedia.com/terms/f/frontrunning.asp

It’s very well-defined in the industry and when you complain about something completely unrelated using that term it muddies the argument for the general public and makes you sound ignorant to the people involved with the industry (both regulators and private participants).

I cursed because it’s the same ignorant argument over and over spreading false information about how the market functions. Actual front running is illegal and companies would get shut down in a heart beat if they were doing it.

Again, this is exactly the behavior I mentioned in the above post. When the general public raises the important question of how much extractive behavior there is in HFT and asks whether the benefits outweigh the value lost by disadvantaged parties, they get brushed off and told that they’re ignorant. Your response focuses on one specific technical allegation while casually admitting that yeah, maybe there’s another type of extractive behavior that happens but “don’t you know the difference between one technical definition of extractive behavior and another?” At the same time no actual answer is given to the core question — presumably the assumption being that unless you are in the HFT world you’re not qualified to have the question answered, even if it affects you and you’re paying for it.

i wonder this; if there is a stop loss already on the books at x price and a HFT enters a market order at that price when a stock is falling, which order will get filled first? i feel like answering this question would sort of answer the argument you guys are making?

as for useful work... we should really just be honest with ourselves/each other [and machine learning/ai might help us to do this] about what is actual useful work. it begs to challenge freedom, but ultimately i think we're headed for an efficiency level that will make the most efficacious worker look lazy af...

It’s simple though, stop claiming people are breaking the law (front-running) if you want to have a productive discussion. It’s not a “technical detail”, it’s a fundamental property of not being able to beat an order that made it to the exchange before yours.

The reason your concerns are brushed off is because they are nonsensical to anyone who actually understands the market. You’re complaining about extractive behavior but are unable to articulate how it is actually happening and calling it “front running” shows that you definitely have no idea how HFT is making money.

Describe the steps by which you think having something like first look or just faster access to the exchanges allows HFTs to unfairly extract money from normal trades.

There’s an entire book by Michael Lewis that describes these steps. I don’t have enough knowledge to tell you how accurate his description is, and I’d be willing to hear a cogent argument in response. But if you agree that those activities are indeed happening and you’re simply claiming that the abuses he describes are not technically illegal or technically the SEC definition of “front running” then your point is noted and my response is: so what? That’s not a defense against the allegations.

> There’s an entire book by Michael Lewis that describes these steps.

Yes, it was widely derided as a one-sided argument used to support a new exchange (i.e. it was glorified marketing material). It was an entertaining book, but it excluded any realistic view about how “the evil side” works in his narrative.

> then your point is noted and my response is: so what? That’s not a defense against the allegations.

The point is that there are no fucking allegations here. When someone comes out and says, “I don’t like HFTs because they front run orders,” and the reply is “that’s not front running”, what is left to defend? They are being accused of a crime they aren’t committing because people don’t know what the crime is.

It’s like claiming the 7-eleven extorted you into buying a hot dog because they offered a 2 for 1 sale. Then someone points out that isn’t extortion. Then you say “so what? That’s not a defense against the allegations.”

Let’s put this another way. There is a reason that no regulation or arrests came out of flash boys. When you actually look at what HFTs do, there is nothing “unfair” to regular market participants. If you put in an order to sell AAPL at $125, there is no way for them to get ahead of that order in the exchange.

I was in the industry (prop trading at BofA). I am no more ignorant than you. Here is a link to help you.

https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article...

Speed and frontrunning are not equivalent. Frontrunning is an illegal practice. Here is an article from FINRA stating as much [0]. Of course, people are always looking for ways to accomplish this. Hell, sometimes the exchanges try to sell it as a feature [1]. Again, no one debates that these types of practices should be banned and penalized (they already are). I'm not inside "the industry" so I don't know if there are some firms that make profit from illicit means by abusing bugs and/or other loopholes where speed matters. However, speed is always an advantage when there are multiple exchanges that sell inter-related products. The same reason why computers are used instead of telephones.

You mention that HFT firms are willing to invest to beat other HFT firms gives the game away. We are both in agreement here but come to different conclusions. The arbitrage "algorithm" is simple in most cases. Futures contracts being sold in Chicago are at odds with equity prices in NYC. The first one to correct them wins. Speed is the only thing that matters. How exactly is people competing in the race "give the game away"?

[0] - https://www.finra.org/investors/insights/getting-speed-high-... [1] - https://www.sec.gov/news/press-release/2012-2012-189htm

It's also possible that HFTs make less money than other traders would have made, if HFT is actually making markets more liquid.

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