Comment by pdovy | Hacker News Reader

Comment by pdovy | Hacker News Reader

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Virtually all trading volume today consists of buying and selling old securities -- essentially, legal claims on existing assets. The sale of new securities issued to finance the creation of new products and services -- for example, a company selling new shares via an IPO -- represents only a minuscule portion of total trading volume.

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Leaving aside for a moment the question of the value of HFT, this is a skewed view of the world of finance. The equities markets may be the most visible to the public (quoted on the news, associated most directly with companies and products we all know, etc), but it's just one market.

In fact, the size of global bond markets is almost double that of equities [1] and is a huge source of funding for companies (and governments), and has more frequent new issues for the same entity than in equities. Similarly futures markets are hugely active and important as both a source of price discovery for commodities and as a way for businesses small and large to hedge risk.

I mention all this not to pick on you in particular, but because it seems in the wake of the financial crises of the past few years, this "finance is bad" mentality seems to be pervasive. There are absolutely problems, but I think it's important not to lose sight of the fact that much of what financial markets do is hugely important to modern businesses and governments.

[1] http://finance.zacks.com/bond-market-size-vs-stock-market-si...

Markets are hugely important. The problem is the size of the investment banks who neither supply the capital nor the equities, but due to proximity of the transaction are able to skim more and more cream out of the transactions and devote more and more brainpower to increasing that arbitrage. They have become so instrumental to the lives of the rich and powerful that they can completely destroy economies and be bailed out by tax payers the majority of whom have absolutely no interest in the solvency of said banks other than some extremely urgent, hand-wavy and fundamentally interest-conflicted warning of economic cataclysm.

Obviously regulation doesn't seem to do much good because it just changes the rules which sends the investments games scrambling for new arbitrage opportunities which no regulatory agency has the resources to keep up with until its too late. Given the lack of political fortitude to combat moral hazard by forcing financial institutions to take their own losses on the chin, I think perhaps widespread and rabid investment banker hate could be the best societal medicine we have against the brain-drain to finance.

Wouldn't a more relevant statistic be trading volume? Stats for that (at least for the US market) are here:

http://www.sifma.org/research/statistics.aspx

It looks like the US bond market daily trading volume is about 25 times higher than the US stock market daily trading volume. However, that statistic is highly skewed by trading in US treasury bonds, which arguably should be a separate category. The same would presumably apply to the stats on market cap.

Also, it's not the relative size of the equities markets that's the problem; it's the amount of effort and talent that goes into what is essentially a zero-sum activity. Bonds and futures (and, to be fair, new stock issues) are positive sum. HFT is not.

(More precisely, HFT is only positive sum to the extent that it improves price discovery and therefore market efficiency; but I have a really hard time seeing how shaving a few more microseconds off trade times changes that significantly. It does, however, 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.)

HFT is on Treasuries - primarily arbing venues (brokertec/espeed/Tradeweb vs CME)

Also on FX

If there is an API normally there is programmatic trading.

Hm, interesting. So I really should have said that bond markets are vulnerable to the disease I described as well.

Full disclosure, I do work for an HFT firm.

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.

nobody is being induced to do anything

"Induce" may not have been the best word; I didn't mean to imply that manipulation of the sort you describe was going on.

What I meant was that the whole point of HFT is to get information about the market state, and act on it, a little bit faster than others; which means that when you make a bona fide offer based on your HFT algorithm's understanding of the market state, that understanding is based on information that the other party to the trade does not have, which means that the other party might accept a trade that, if they had the same information as you do, they would not accept. That is asymmetric information. There doesn't have to be any skulduggery going on; it's a natural consequence of what HFT algorithms are designed to do.

why should it be curtailed?

I'm not saying it should be curtailed; I'm saying that it's a shame that so much talent and effort goes into a zero-sum activity, and that that fact is a big part of why ordinary people distrust the financial system. In other words, HFT is giving other more beneficial financial activities a bad name. The right way to change that is for the financial system to police itself.

I think that is a dangerous standard to enforce anywhere.

I agree, and that's why I think the financial system needs to police itself, before it gets policed by others who don't agree with you and me that such a standard is dangerous to enforce.

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