Barbarians at the Gateways: High-frequency Trading and Exchange Technology

In fact it wouldn't surprise me if some sophisticated neural net algorithm developed for HFT was repurposed and used successfully for other things - medical research, climate modelling, brain research - basically anything involving non-linear dynamic systems.

Only problem of course is that all those HFT algorithms aren't FOSS, but the incentive to develop them in the first place would be greatly diminished since they'd lose whatever edge they had almost immediately after publishing.

The markets are a pretty decent lab for experimentation and learning about complex systems, which we're still not so great with, as long as systemic risk can be prevented and every player forced to take their losses instead of passing them off to governments. I personally don't think HFT is remotely as much a problem as what caused the financial crisis - a few flash crashes here and there plus an "HFT tax" on asset prices, vs the arguably-fraudulent origination and dissemination of trillions of dollars of bad debt resulting in the near total annihilation of the global economy. I think we'll gain a lot more (or at least lose a lot less) as a society by prioritizing the latter problem.

Well, smart people's labor isn't your property to allocate. Nor is it the property of "us." It belongs to those individuals.

So it's not a question of what "we" can or cannot afford.

Citation? The world's perception of Tesla is arguably: expensive, unaffordable, impractcle plaything for rich people. But yeah I would drive it if you paid for it...

The reason you hear so much about HFT is because the traditional firms it is displacing want you to.

Also on FX

If there is an API normally there is programmatic trading.

To the last part of your argument:

significantly change who is able to benefit from asymmetric information by inducing others to take the wrong end of zero-sum trades, which is what HFT is designed to do

This is simply untrue, nobody is being induced to do anything. Tactics like submitting orders you don't intend to let trade, to make other participants believe there is interest when there is not is illegal and enforcement is more aggressive than you might think.

To the remaining part, if you believe that HFT improves market efficiency to the extent that it exists, but don't think that the increasing competition provides additional value - OK. I'll work with that, but then if we can come around to a view that HFT is at worst neutral, why should it be curtailed? Simply because some think the people who practice it should spend their time elsewhere? I think that is a dangerous standard to enforce anywhere.

edit: I guess, I did though.

I can't help to reply to the adwords question - although you can argue that advertising/marketing is soulless, at least it creates real world value. Someone makes a product, someone else buys it. Exchange of goods happens.

Derivatives are uncontrallable in the my humble opinion. Especially if regulated by uber greedy people. And it makes me sad sad when I see the highest skilled people go and put their talent in something that is pretty much useless, apart from making a few, selected people even richer than they are. But I guess, whatever pays the bills.

But that's not why I made my comment. I made my comment, because what I find even more sad, is people going numb to injustice and admiring this situation and the people who are making it possible.

Amazement (dopamine rushes) confuses us.

Biologically, we respond to amazement as part of the learning process. But all too often, we receive these dopamine rushes simply as a consequence of the amount of resources and effort someone (or a group) puts into something.

e.g. You can go to Las Vegas, see thousands of people running around topless in gorgeous outfits and be amazed, yet what's the actual value to you?

I see this ALL too often in art. People get "amazed" by things that require a great deal of effort/resources (look how many transistors in this CPU!), but this temporary narcosis blinds us to evaluating /whether it's a good idea/. So many art projects are simply the result of an ordinary person commanding extraordinary resources from a corporate entity to construct a large number of instances of a single, mundane object or a single, large-scale version of the object. In these cases, the art is not in the sculpture, but in the conning to get the resources. I see budding artists respond to this amazement and trying to get huge funding.

Internet bloggers (Cory Doctorow comes to mind) abuse the word "amaze" all the time. I just checked boingboing.net right now and saw amazing used to describe wallpaper (no dude, this is /natural history/ wallpaper).

If this was any other industry it would be lauded. I don't understand the moralizing about this industry while we applaud start ups for building ever more complex twitter aggregators.

I suppose I get concerned when I see forces applying moral judgment to investment techniques and timescales (as distinct from companies actions, where I think it's easier to judge - e.g. not wanting to invest in tobacco, for example).

The long term investor is not necessarily more moral than the short term investor, though he may be. But part of the long-term investor's confidence in his investment emerges from the fact that he can exit his investment if he judges that long term trends make it less valuable to hold it.

That liquidity is, in large part, created by the churn of short-term speculators operating in the zero-sum game of the short term. Spare no tears for the short term-speculators - they operate in a tough game, and the ones who actually thrive and stay around for the long haul do provide a valuable service - reduced trading costs, narrowed bid-ask spreads, and faster order execution as a commodity.

Similarly, products such as ETFs (held by millions of small investors and 401(k) accounts) owe their existence to the ability to rapidly rebalance portfolios in response to changing prices of the underlying products that the ETFs are trying to replicate. Prohibiting rapid trading eliminates the possibility of the various affordable products that track indexes, commodities, sectors, and so forth.

People seem to have this idea that back in the days of floor-based trading you could just call up the NYSE and say, "sell 1 million shares of Citigroup!" and the market makers would just kindly oblige you, without widening their spreads or trying to eke out a bigger gain from a transaction which inherently carries significant risk for them.

It's possible that the situation for executing giant orders in one fell swoop hasn't gotten any better under HFT, but it hardly seems to have made it worse. And as the large flow traders become more sophisticated and start to implement algos of their own, they'll get better at moving volume at a fairer average price.

> With HFT, it's the same 100 shares/futures changing hands thousands of times per day, and they disappear often in times of uncertainty.

I don't know about "often," unless you're talking about trading individual issues where news events introduce a high degree of uncertainty. There's really only been one case of a market-wide drying up of liquidity, which lasted for about 15 minutes during the flash crash.

There's also nothing new about market-maker liquidity drying up in times of uncertainty or severe volatility. Plenty of stocks went "no bid" during the 1929 crash. Floor-based market makers are no more interested in standing in front of freight trains than algos are. If you're looking for someone/something to blame when markets crash and there are no bids to be found, focus on the Fed and its attempts to manipulate the credit cycle, which periodically fail in spectacular fashion.

It is better to think of these as dials than as hard requirements. Some algorithmic decisions take a very long time to make decisions, other electronic trading systems hold positions for weeks or even months. I've seen very low latency systems that only trade a few times per day.

Finally, your currency trading example is perfect. The reason HFT's are less involved in those markets is that they are known to be dominated by insider deals and old boy network cronyism. It is not a "fair" place to trade. If HFT were to come in that may or may not change. I suspect it would get better.

-lolcraft, 1852

Now, the resources that were going to traditional specialists and a subset of the professional traders, are going to HFT's, with some of that returning to investors in form of lower trading costs (if we buy the argument that liquidity has indeed improved, of course. Most of what I've seen indicates that it has.) As a side effect, we have technology improvement, useful for other things.

Now, there can be an argument made against HFT's, and in favor of more traditional traders, related to a potential decline in market depth. So far, I have not seen any convincing proof of this being the case, but I am open to it.

However, I think a lot of people arguing against HFT's do not quite understand that their position is literally that we need to enact legislation in order to protect Wall Street from competition :)

You're talking to an unabashed proponent of subpenny increments. Smaller spreads, more counterparties, faster execution -- these things cannot possibly hurt.

Note that I am talking about the concept of HFT. It's true that there are shady operators who abuse rules and undertake things like quote stuffing. I'm not here to defend any of that.

> So you got your order filled in 5 milliseconds instead of 6 milliseconds. So what? You're a person.

Still a net benefit even for just market orders. Limit orders benefit much more from HFT, particularly the stop-hunting variety. I think of the randomized price action as similar to quantum noise. No one really knows to the nth decimal what the price should be, but it wanders around where the money thinks it should be.

So that noise can help trigger your limit trade at exactly the price you want, whereas the false placidity of more granular enforcement is less likely to hit your limit.

Now let's look beyond just me and consider that some firms get more relative benefit from HFT than I do, and that these slivers of benefit sum across market participants.

> And stocks without enough liquidity to get to a penny spread? The HFTs don't like those stocks, because the "F" is not "H" enough for them to participate. The very nature of HFTs is that they prefer to participate when there is already plenty of liquidity.

Of course -- this should not be surprising in the least to anyone paying attention. The reason HFT practitioners participate is to attempt a profitable strategy. Liquidity is the side effect, not the goal. So while it's fair to say they provide liquidity to the market, or even that providing liquidity is the role they play, it's neither their duty nor their motivation.

Similar to how commodities speculators provide counterparties for nervous farmers, they are guided by the invisible hand and not by duty.