HFT changes these "beliefs in company" to "beliefs that the stock will go up", and the timeframe of those "beliefs" is sometimes in milliseconds. This turns classic "investment" into a computer game with a lot of real money.
The only meaningful way to limit the efficacy of these modern trading styles would be purposeful market friction through minimum holding times, circuit breakers, etc. You can't just legislate that people mustnt have low ping.. it's impossible to enforce. And those market friction mechanisms can create scary market conditions like backlogs, etc and guess what, enable market making brokerages to do internal swaps etc. in spite of the friction and essentially be the only ones able to bypass restrictions.
HFT does very similar things, except it's even more opaque to those not doing it. Large financial firms and exchanges sell their order data to HFTs. If you're interested in a deeper dive on what they're doing, a book like Flash Boys will explain how there's a lot more going on than just a quicker network connection.
Most of this is improvable with software. As other commenters point out, the resistance is from incumbent trading institutions who have a lot invested in the status quo.
What is an order cancellation? Would different legs on a hedge count as a cancellation?
The closing window is a massive challenge as well. It would have to be accurate down to the nano second and you can bet the exchange is going to get litigated against depending on which bucket the order ends up in.
If you set up mandatory delays per client you would have each hedge funds split up into hundreds of shell companies to get around it.
Having worked at exchanges, most surveillance and analysis of trades happen after the close of day. You’re proposing a literal real-time surveillance system that would be absolutely massive in scale.
> The closing window is a massive challenge as well. It would have to be accurate down to the nano second.
It wouldn't have to be - one could even say first second is for bids, second second there are no bids but a delay to give auction results mid-second and allow people to process.
> the exchanges would know
They can be forbidden to sell that info real-time by their regulator (it arguably would be market abuse and that could be made explicit).
It is definitely not impossible like you are trying to imply. (Financial markets participant with 20 years in the market here, for what it's worth.)
So I occasionally try to think of a reason to have a guaranteed delay due to signal propagation delay to/from Mars. Would there be a use for putting an automated exchange there? Maybe, but then whomever gates the orders could monitor and predict what will happen 40 minutes out or whatever. Need TLS from trader to exchange or something.
What you're proposing is actually not a ban on HFT, it's a ban on investment strategies other than value investing. How would you implement that in practice? Have every investor swear under oath that they do believe in the company's inherent value, regardless of the rest of the market's behavior?
> HFT goes against the original ethos of a market open to all.
What "original ethos" is that? And even if it existed, wouldn't excluding certain investors go against it much more?
And for the how, just limit the number of transactions one can do per second or the money one can exchange per second. Then everyone will have to be smart instead of being the one with the best connection. Or split the markets in "Joe invests" market and "Bigcorp" invests.
Whatever scheme is defined as "stock exchange" can surely be fixed by another scheme. Humans have been inventing games and agreed to rules for centuries, it's not like it's something we can't do.
It would take a heavier hand to push against this problem. I'm all for it, I'm just not clever enough or knowledgeable enough to know what would be a good regulation that would fly in congress.
https://www.brookings.edu/opinions/congress-wants-to-tax-sto...
I wonder what happened to it.
Hong Kong has an FTT of 0.13% currently, it was 0.1% from 1993-2021 so you can compare HFT impacts on these markets. Or compare dozens of other countries with similar rates, Switzerland, Taiwan, France, Italy, Japan.
I haven't thought about this enough, but one thing I'd note is that HFT is risk-taking, and taking a risk generally has the possibility of profit or loss.
A second thing would be that the phrase "society's resources" is a bit dangerous, as it might let us think that the money they're using is somehow everyone's money. When in fact they're spending their money on this, hoping to make a profit.
From the perspective of the whole economy it is everyone's money. Rent seeking behavior is a dead weight loss due to market inefficiency. Through tax policy the incentives can change and largely remove this inefficiency.
Compute all you want, whenever you want, but instead of millisecond timings, optimize stuff for at least some time.
Maybe even a tax on stock profits, which is really high and falls after some time of ownership of such stock (we have this in slovenia, but it's not really high in the first place, and time brackets go less than 5 years (25%), 5-10 years (15%), 10-15 years (10%) , 15-20 years (5%), and zero tax after that.
One attempt is the exchange IEX [0] which introduced a ~350 microsecond delay to everything simply by running incoming order data through a ~60km loop of fiber-optic cable.
Perhaps not the most, er, featureful solution, but it's very easy to audit and argue that there are no biases or backdoors.
Iex also offers a variety of (dark) order types that can pull back without the 350us delay if iex believes the incoming flow will be toxic
IANATrader, but I don't think that's entirely true. Yes, it won't stop Carol from getting information from somewhere and then running in front of Alice to the same exchange. [0]
However even fixed-delays [1] can still create uncertainty about what price your order may actually execute at when it hits the server, which is something HFTs rely on more heavily than other traders, since their strategy depends on high-certainty that they will have a small positive margin on every trade.
__
[0] I find it geeky-amusing to write (i.e. IEX) or (ex: IEX) because it feels like the start of a mental tounge-twister.
[1] Can't edit my original post anymore, but apparently there's another 350μs on the outbound path too.
This is also true on every single other exchange, albeit to a smaller degree. You have a larger queue of possible things that may have happened, but this issue exists everywhere. No exchange has instant entry.
On a very short timescale things are very jumpy - nothing happens for a while, and then everything happens all at once. The queuing problem tends to be more of “did another hft beat me to the same event”, not general random other events, so queues like IEXs tend to be emptyish anyways.
Minimum time between buying and selling the same ticker
Mandatory network 'speed bump' of a few ms between the exchange and any trading parties
It would be slightly amusing to see some sort of HFT ban, only to see people speedrun re-inventing HFT as numerous problems unfold, like dad putting in a market order for AAPL on a day it had a VWAP of $185 and having his trade execute at an average price of $690. Or more serious problems like shortages and surpluses of commodities in different locations due to bad price information.
I was pretty skeptical too, but the more I look into it, the more it just boils down to market making (providing liquidity) and arbitrage (improving price quality across exchanges).
There might be dirty tricks there too – I'm only speaking for legal trading practices here. And if an HFT makes its profit using illegal methods, what's the difference between that and other financial crimes like insider trading, collusion to frontrunning etc.?
I don't really get the (to me somewhat irrational/uninformed) focus on HFTs, when things like payment for order flow probably "siphons off" just as much from retail investors' trades.
None of this prevents you from investing using whatever long-term paradigm you prefer. The effects of HFT on that investment style are negligible.
I don't think this is generally true. Stock trading isn't charity, it's done to make a profit. Almost trading is done on the basis of second order effects, and has been for as long as there's been a stock market. Stocks aren't given value by the company being profitable, they're given value by what other people are willing to pay for them (okay, yes, dividends also factor in, but many companies don't pay dividends and people still assign value to those stocks).
The honest answer is probably nothing.
As far as I can tell, it neither benefits us, nor costs us. It siphons off a tiny fraction of money, too small to notice, but large enough in aggregate. Some parasite gets to survive, which is annoying if you look directly at it, but ignorable if you don't.
Not at all. If you, for whatever reason, need to sell right now, putting in a market order in an illiquid market can cost you a lot.
It can be discussed how big the contribution of HFTs to market making really is (large companies or exchanges often employ dedicated market makers, I believe?), but the benefit of market making itself should hopefully be obvious.
If the HFTs only trade when the market is already made (or will certainly be, milliseconds later) then they're not really adding any liquidity. They're just doubling the liquidity which was already sufficient.
Are high frequency traders trading in illiquid markets?
That would be surprising to me, it's not high frequency if it's not high volume, and you open yourself up to larger bid/ask spreads.
Apple should go up in price slightly, because someone (me) just made a big bet that it's going to do well. The market does this automatically.
TSMC should also go up in price very slightly, because Apple doing well makes it more likely that TSMC (a major vendor of theirs) will also do well, and the market just learned that Apple is slightly more likely to do well, so it also just learned that TSMC is more likely to do well. In other words the companies performance is correlated, so the stock prices should be as well.
By my understanding HFT is the mechanism by which the market can make TSMC go up slightly as well. High frequency traders can react to the information that apple is going to do better (as per it's increased stock price) and buy a bit of TSMC.
This seems like it should make the market more accurate, and if you buy that the market accurately assigning values to a company is a good thing, seems like a good thing.
Proponents argue that HFT and other such innovations provide liquidity to markets; my skeptical take is that this is a nice technical-sounding term for traders with cash to lowball falling asset prices.
1. You could put a limit order at 185$ or lower. But maybe no one is putting a sell order at this price? So you are stuck waiting for some time, maybe never if the price keeps going up? 2. You could put it at 190$ to trigger a trade but you risk buying 5$ more than what you originally wanted if people already cleaned up the book from 185$ to 190$.
The only reason you can definitively say that an apple stock is worth exactly 185$ right now is liquidity/depth of the market. Because there are enough players in the game that is willing to make miniscule amount of profit in very short amount of time.
No, this is the part most everyone gets wrong about HFT. These systems make money off of volume, not price. They don't care if the price is going up or down. All they care about is that they can capture a small price delta by facilitating a trade faster than someone else and they are willing to do so for smaller fractions of a cent which makes them more attractive to all market participants, including you and your retirement funds. Their concerns are orthogonal to investors and they compete with other HFT firms and market makers.
I think that's only true for IPO shares which often aren't available to retail investors/gamblers like me.
Not quite: By buying shares in a company, you positively influence its share price, which reduces cost of capital for the company (in case it needs it).
Arguably, the difference in impact (in terms of enabling/steering companies to do things) between the IPO and secondary market these days is probably negligible compared to any two single private funding rounds.