Is there any good reason for high-frequency trading to exist? People often complain about bitcoin wasting energy, but oddly this gets a free pass despite this being a definite net negative to society as far as I can tell.
On individual trades. I would think you'd have to also argue that their high overall trading volume is somehow also a benefit to the broader market or at the very least that it does not outcompete the benefits of narrowing.
This is not true and in fact when I hire quants or developers, I have to spend a surprising amount of time even teaching people with PhD's in statistics that the random nature of the stock market does not mean that it's a coin toss. It's surprising the number of people who should know better think trading is just about being right 51% of the time, or that typically stocks have a 50/50 chance of going up or down at any given moment...
What's closer to the truth is that stocks are actually quite predictable the overwhelming majority of the time, but a single mistake can end up costing you dearly. You can be right 95% of the time, and then lose everything you ever made in the remaining 5% of the time. A stock might go up 10 times in a row, and then on the 11th trial, it wipes out everything it made and then some.
Still, I don't feel that it's wrong: Even on rereading, my phrasing seems to address GP's misunderstanding in an immediately accessible way. Which is better, a complicated answer that leads to proper understanding (if you understand it) or a simple answer that solves the acute misunderstanding (and leads to a smaller misunderstanding)? Both kinds of answer have merit IMO.
I would argue that HFT is a rather small space, albeit pretty concentrated. It's several orders of magnitude smaller in terms of energy wasting than Bitcoin.
The only positive from HFT is liquidity and tighter spreads, but it also depends what people put into HFT definition. For example, Robinhood and free trading, probably wouldn't exist without it.
They are taking a part of the cake that previously went to brokers and banks. HFT is not in a business of screwing 'the little guy'.
From my perspective there is little to none negative to the society. If somebody is investing long term in the stock market, he couldn't care less about HFT.
I tend to agree that for long term investment it probably doesn't make a huge difference except for possible cumulative effects of decreased liquidity, increased volatility, flash crashes, etc. Also possibly a loss of small investor confidence since the game seems even more rigged in a way that they cannot compete with.
Regardless, there are no natural events that necessitate high-frequency trading. The underlying value of things rarely changes very quickly, and if it does it's not volatile, rather it's a firm transiton.
This will result in another market where deals will be made and then finalized on that 'official' when it opens. It's like with employee stock. You can sell it before you can...
I thought that this was explicitly forbidden in most SV employment contracts? "Thou shalt not offer your shares as collateral or (I forget the exact language) write or purchase any kind of derivative to hedge downside.' No buying PUTS! No selling CALLs! No stock-backed loans!
Or do people make secondary deals despite this, because, well, the company doesn't know, does it?
It would be nice to be able to buy and sell stocks more than once a quarter, especially given plenty of events that do affect the perceived value of a company happen more frequently than that
HFT makes the financial markets a tiny bit more accurate by resolving inconsistencies (for example three pairs of currencies can get out of whack with one another) and obvious mispricings (for various definitions of "obvious")
You have to allow strategies that can induce other strategies as by definition those also increase liquidity. It’s a difficult problem to explain to anyone except the very few people who can understand the extremely complicated feedback loops that result from bots fighting bots, however the regulators actually have access to counterparty tagged exchange event data and what is found when this is analyzed is that the net cost for liquidity that is extracted by market makers and short term traders from longer term participants is continuously decreasing not increasing. The system is becoming more and more efficient and not less. This is good for markets and the economy. There are also less people working in financial markets per capita than ever before, granted those who are might include a higher percentage of highly skilled and specialized and educated individuals than previously, which some might argue might be better used in some other industry, but that is rightfully not what the market wants.
There is absolutely no logical reason to “kill off this entire field” those sentiments are purely envy based reactions from those who don’t understand what is happening.
So wether pairs of people want to buy-and-hold or HFT their assets is really neither here nor there for uninvolved third parties.
Liquidity removal = market order
Liquidity providing = limit order (not immediately executable)
The only difference between an order that removes liquidity and an order that adds liquidity is whether it executes upon arrival (removing liquidity) or rests on the order book on arrival (adding liquidity).
Yeah, this is highly frustrating particularly for people like me who don't know anything about the domain i.e. HFT/Trading and would like to know more.
Can you recommend some good introductory books/resources ?
“Trades, Quotes and Prices”
Authors:
Jean-Philippe Bouchaud, Capital Fund Management, Paris, Julius Bonart, University College London, Jonathan Donier, Capital Fund Management, Martin Gould, CFM - Imperial Institute of Quantitative Finance.
I’m a practitioner and this book is foundational.
Just FYI for others; the full name of the book is "Trades, Quotes and Prices : Financial Markets Under the Microscope".
Looks like a very comprehensive book though somewhat advanced for me at my current level. Do you have a more beginner level book/resource recommendation to go with this where from i can get an overview and familiarize myself with the jargon?
There's someone on the other side of your trade when you want to trade something. You're more likely than not choosing to interact with an HFT player at your price. If you're getting a better price, that's money that you get to keep.
*I'm going to disagree on "free pass" also. HFT is pretty often criticized here.
- Increased liquidity. Ensures there's actually something to be traded available globally, and swiftly moves it to places where it's lacking.
- Tighter spreads, the difference between you buying and then selling again is lower. Which often is good for the "actual users" of the market.
- Global prices / less geographical differences in prices. Generally you can trust you get the right price no matter what venue you trade at, as any arbitrage opportunity has likely already been executed on.
- etc..
I just wanted to highlight this one in particular - the spread is tighter because HFTs eat the spread and reduce the error that market players can benefit from. The spread is disappearing because of rent-seeking from the HFTs.
Now, does this need to get towards milli-seconds or nano-seconds? No, this is just the equivalent of many of these middle-men racing to give you an offer. But it's (part of) how they compete with each other, and as they do so they squeeze the margins of the industry as a whole: In fact the profits of HFT firms have decreased as a percentage of the overall market and in absolute terms after the initial peak as they displaced the day traders doing the same thing.
This hits the nail on the head. For a trade to happen, counterparties need to meet in price and in time. A market place is useless if there is nobody around to buy or sell at the same time you do.
The core service market makers provide is not liquidity. It's immediacy: they offer (put up) liquidity in order to capture trades, but the value proposition for other traders - and the exchanges! - is that there is someone to take the other side of a trade when a non-MM entity wants to buy or sell instruments.
It took me a long time to understand what the difference is. And in order to make sure that there is sufficient liquidity in place, exchanges set up both contractual requirements and incentive structures for their market makers.
I doubt this is true, but there are definitions attached to front-running.
Because it's legal and profitable.
If you don't like it, try to convince regulators that it shouldn't be legal and provide a framework for criminalizing/fining it without unintended consequences, and then find a way to pay regulators more in bribes than the HFT shops do, even though their pockets are deeper than yours, and then things may change.
If that sounds impossible, that's another answer to your question
What did you examine to reach that conclusion? If high-frequency trading were positive for society, what would you expect to be different?
The reason for high-frequency trading to exist is that the sub-penny rule makes it illegal to compete on price so you have to compete on speed instead. Abolishing the sub-penny rule would mean high-frequency trading profits got competed-away to nothing, although frankly they're already pretty close. The whole industry is basically an irrelevant piece of plumbing anyway.
No.
When your passive index fund manager rebalances every month because “NVDA is now overweighted in VTI, QQQ” the manager does not care about the bid/ask spread.
When VTI is $1.6 trillion, even a $0.01 difference in price translates to a loss $60 million for the passive 401k, IRA, investors.
HFT reduces the bid/ask spread, and “gives this $60 million back” to the passive investors for every $0.01 price difference, every month. Note that VTI mid price at time of writing is $272.49.