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Comment by jacoblyles | Hacker News Reader

What's the harm in HFT? It certainly increases liquidity in the market, making it easier for other investors to enter or exit a position on short notice. That's a good thing.

Let's not fall pray to generalized anti-finance populism without good reason.

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Interesting question. What if HFT algorithms become so efficient they are able to easily out-compete human trading decisions, such that humans exit the system altogether? What if the stock exchange becomes exclusively HFT algorithms competing against eachother on behalf of large funds, such that being a 'trader' is all about which fund to put money into (which algorithm suite to back)?

In such a thought experiment, what if the algorithms discovered more money could be realized by trading on a vector different to 'the current/future worth of a company'? Say a genetic algorithm determined that whether the share price ended the week's trading on an odd number rather than an even number is more important for predicting the future direction of the price on Monday. In the world of genetic algorithms, stranger shit has happened. What impact would this have?

I don't know much about trading, particularly HFT, so I don't even know if this is possible or realistic. I do love thought experiments though, and believe that HFT algorithms are currently trying to predict human responses to market events and act accordingly. Just wondered what would happen if they dominate a market such that human influence is negligible. So yeah, interesting question.

My suspicion (which I can't prove--this is just a gut feeling) is that there is an economically correct price for any given thing, and that markets will move toward that price. This economically correct price only changes when factors in the "real world" change, or we have reason to believe factors in the real world are going to change (e.g., bad weather might reduce crop yield, or forecasts of bad weather make is expect a reduction in yield).

Actors in the markets get information not only from real world sources (e.g., news reports), but also infer information from the activity of other actors in the market, so there is a bit of a feedback look in the market.

My suspicion is that as you increase the frequency of trades, starting from very infrequent (e.g., people trading in person directly with the person they are buying or selling from) and then going to faster and faster methods (trades by mail, then telegraph, and so on), there are two effects. First, the market is able to more quickly converge to near the "correct" price for the item, and there is some increase in fluctuation around the correct price due to strengthening of the feedback loops.

I suspect that there is some optimum trading speed, which depends on the rate that the real world events (things like weather changes, fashion, wars, and so on) happen, and when you push trading speed past that you stop gaining on convergence speed, but continue increasing instability due to the feedback loops.

The result is a market that is less and less tied to the real world. In effect, the market ends up making up information from the trading activity itself. The trading essentially ends up being based on noise rather than signal. It's hard to see how that can be good.

trading activity is information because it is real people putting real money at risk and expressing their views of what the assets are worth. As in any competitive market, HFT traders cannot make money if they only trade with themselves - that is a mean zero proposition. But by trading with people who price the assets incorrectly at a point in time, they help move asset prices to their "correct " levels

If you read article, you may find that the argument is that the speed of the trades creates the perception of an unfair advantage and has even supposedly impelled larger buyers and seller to move the "dark pools". Now all this might wrong but it seems like a bit more than "anti-finance populism".

And the thing with the liquidity created by HFT is... if that liquidity is going to be suddenly withdrawn all at once, you've lost the advantage of liquid market, which is that you always have a reasonable chance of quickly selling at a reasonable price.

Maybe requiring registering and stress testing of HFTs over a specific volume is a solution. Or as a cost of registering a HFT is a requirement to "make the market" whether the HFTer likes to or not , there should be plenty of opportunities to hedge or offset any unwanted positions.

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